Bloomberg News

Danish Bail-In Trauma Consigned to History in Merger Wave

April 27, 2012

The offices of Amagerbanken A/S stand in Copenhagen. Photographer: Ulrik Jantzen/Bloomberg

The offices of Amagerbanken A/S stand in Copenhagen. Photographer: Ulrik Jantzen/Bloomberg

Fourteen months after pushing losses on to senior creditors with the failure of Amagerbanken A/S, Denmark is freeing itself of the bail-in stigma that shut most of its banks out of international funding markets.

Legislation passed in October 2010 requiring burden sharing has since been superseded by two bills subsidizing mergers for troubled lenders. Three insolvent banks resorted to the merger package in the last six months, and Denmark hasn’t had a bail-in since the June failure of Fjordbank Mors A/S.

“The fact that we have for the last three times found a solution to avoid losses to senior creditors is a sign that there is a substantial probability that we can do it again,” Henrik Bjerre-Nielsen, chief executive officer of the state resolution agency known as Financial Stability Co., said in a phone interview. Bail-ins are an “inferior solution,” he said.

Denmark’s efforts to avoid more bail-ins coincide with European Union discussions on the merits of introducing burden sharing across the region. While bail-ins can help align funding costs with risks and break “negative feedback loops” between sovereigns and banks, the model may inflict financial system shocks if deployed clumsily, the International Monetary Fund said in an April 24 discussion paper.

‘Creates Contagion’

“The process we’ve been through in Denmark shows it’s dangerous to push legislation like this in the middle of a crisis,” Jesper Berg, a senior vice president at Copenhagen- based Nykredit A/S who helped write Denmark’s bail-in model while working at the central bank, said in a phone interview.

The authors had envisaged the rules taking effect only after calm was restored to financial markets, he said.

Enforcing bail-ins mid-crisis “creates contagion,” Berg said. “The Danish authorities have wisely taken a step back and gone for a more cooperative approach that avoids losses to senior creditors.”

The three-month Copenhagen interbank offered rate was quoted at its lowest since at least 1988 today, declining to 0.9475 percent. Denmark’s 10-year bond yielded two basis points less than similar-maturity German bunds today, versus one basis point yesterday.

Denmark’s parliament has introduced two bank rescue packages since September to help the industry sidestep its bail- in legislation. Under deals orchestrated by the state resolution agency, Den Jyske Sparekasse agreed to take over all of Spar Salling Sparekasse and Sparekassen Kronjylland A/S will buy the healthy parts of Sparekassen Oestjylland A/S, the banks said on April 22. Max Bank A/S was bought by Sparekassen Sjaelland A/S in October.

G20 Meeting

Michel Barnier, the EU’s financial services chief, said last month he’ll aim to present a draft law on winding down failed banks, including plans for creditor writedowns, by a meeting of Group of 20 leaders in June.

“It’s wise of the European Commission to be tip-toeing around this subject as long as the crisis persists in Europe,” Berg said.

Denmark’s banks are still struggling to emerge from a burst real estate bubble that has eroded farming, building and housing portfolios. The economy slipped into a recession in the third quarter while foreclosures soared 32 percent in March to the highest level in 17 years.

The Financial Supervisory Authority and the Financial Stability Co. are urging Denmark’s troubled lenders to make use of the consolidation packages or risk shutting themselves out of funding markets again. The bail-in legislation is a powerful tool in impelling lenders to team up in mergers, Bjerre-Nielsen said.

‘No Other Solution’

“I think the whole banking industry knows that if there is no other solution, it will have to go down that route,” he said.

Vestjysk Bank A/S and Aarhus Lokalbank A/S this week won temporary EU approval to tap Denmark’s consolidation package for their January merger. The regional lenders used the facility even though they were deemed solvent in an FSA audit.

Moody’s Investors Service, which cited a lack of government support when it downgraded five Danish banks the same month Amagerbanken failed in 2011, said this week the takeovers of Spar Salling Sparekasse and Sparekassen Oestjylland A/S were “credit positive” for Denmark’s financial industry.

‘Well Prepared’

“We were well prepared and the banks were too, in the sense that they had already been in contact with several interested bidders,” Bjerre-Nielsen said. “We were able to organize a process where we could maximize the price and that’s what it’s all about in order to avoid a situation where the senior creditors are losing money.”

The consolidation package that paved the way for the deals is good for the bank industry, though not a “cure all,” Moody’s spokeswoman Jessica Sibado said.

Lawmakers passed measures last year to allow the Financial Stability Co. to sell the healthy parts of struggling banks and enable the Guarantee Fund for Depositors and Investors to provide a so-called dowry as an incentive to potential buyers. The fund was established by parliament and is financed by the financial industry.

The state wind-up agency and troubled banks have trawled the country to identify potential buyers, Bjerre-Nielsen said. The government has also made it easier for the FSA and the wind- up unit to exchange information, he said.

‘Tipped Off’

“We were tipped off by the FSA” about Spar Salling Sparekasse’s and Sparekassen Oestjylland’s plight, Bjerre- Nielsen said. “We are trying to move along the learning curve so that we are able to be more specific about what kind of information we want.”

Danish lenders are returning to funding markets. Sydbank A/S (SYDB), Denmark’s third-largest listed bank, in February sold its first senior bonds since 2010, paying 200 basis points more than the euro region’s interbank offered rate on 500 million euros ($658 million) of two-year notes. That followed a sale by Danske Bank A/S in the same week of 1 billion euros in five-year notes at 230 basis points more than the benchmark mid-swap rate.

“The best thing that could happen is if there would be more interest in acquiring banks in the future,” Bjerre-Nielsen said.

To contact the reporter on this story: Frances Schwartzkopff in Copenhagen at

To contact the editor responsible for this story: Christian Wienberg at

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