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Deceit Behind Danish Bank Bust Impossible to Catch, FSA Says

November 07, 2012

Denmark’s financial watchdog defended its failure to prevent alleged accounting fraud at the nation’s latest bank insolvency after lawmakers called for a probe into the regulator’s practices.

Toender Bank A/S, which declared bankruptcy on Nov. 2 after an inspection by the Financial Supervisory Authority revealed impairments big enough to wipe out the regional lender’s equity, was guilty of a “massive misrepresentation” of its financial health that more rigorous scrutiny wouldn’t have uncovered earlier, FSA Director General Ulrik Noedgaard said.

“It’s massive non-compliance with the laws and regulations, and we can never be 100 percent sure that this won’t happen again,” Noedgaard, whose office is based in Copenhagen, said in an interview yesterday. After going over the accounts of 90 of Denmark’s roughly 105 banks, “we haven’t seen anything like this before,” he said.

More than a dozen regional lenders have collapsed since Denmark’s housing bubble burst in 2008, threatening to push the nation into its second recession in less than a year. The International Monetary Fund said Nov. 5 that the FSA should broaden its oversight of Denmark’s regional lenders and even consider enforcing risk-based deposit insurance.

Default Swaps

Toender Bank, which less than two months ago raised $5 million in new hybrid capital, was declared insolvent after the FSA’s inspection revealed 319 million kroner ($55 million) in bad loans. Sydbank A/S (SYDB), Denmark’s third-largest listed lender, took over the bank’s 18,000 customers and assets, though it won’t assume Toender’s hybrid or supplementary capital.

Credit-default swaps on Denmark rose to the highest level in almost two weeks when markets opened Nov. 5. The 57-member index of listed Danish bank stocks fell to its second lowest level in almost three months. The index rose today in Copenhagen to 1010.42.

The bank’s failure should prompt an investigation into the FSA’s oversight practices, Benny Engelbrecht, a business affairs spokesman in Prime Minister Helle Thorning-Schmidt’s Social Democrat party, told Borsen.

Business Minister Annette Vilhelmsen will seek an investigation into Toender Bank’s sudden failure to see whether criminal charges are warranted, she told the newspaper. The collapse should also lead to tougher rules for bank auditors, she said.

BDO Investigation

Toender Bank’s auditor, BDO, said it’s halting in internal investigation and will instead work with the Business Ministry to determine whether its employees complied with regulations. The accountancy employs more than 1,000 people in 29 offices throughout Denmark, according to its website.

“BDO welcomes the ministry’s investigation,” Stig Holst Hartwig, the company’s managing director, said by phone. “Until that review is finished, we have no further comment.”

Toender Bank wasn’t on the FSA’s list of lenders risking insolvency because there were no signs it faced bankruptcy, Noedgaard said.

“Taking into account the massive misrepresentation, it raises a question of” incompetence at the auditor level, Noedgaard said. “Clearly, what we found was that the second- quarter report from Toender Bank was not in any way compliant with the accounting rules.”

Misstated Writedowns

Toender Bank said in August its writedowns were 32.5 million kroner in the first six months, about one tenth the amount the FSA found in bad debt. The bank reported a three-fold increase in net income and said its solvency ratio -- a measure of financial strength -- was 17.3 percent at the end of June.

The FSA is now reviewing the lender’s 2011 accounts to determine whether the bank also misstated writedowns for that year, Noedgaard said.

“It’s hard to imagine all losses came within six months,” Noedgaard said. “The numbers here are of an order of magnitude -- the distance between the accounting of the bank and what we deem to be the real picture -- are beyond anything we have seen over the last three years.”

The Danish Shareholders Association said yesterday it is considering legal action after its members about 260 million kroner. The Copenhagen-based group may seek damages “for a portion of the losses in the scandalous bank failure,” it said in an e-mailed statement.


“The surprise here is that -- based on all the available information, from accountants, what they reported to us, what we got from other banks -- nothing has pointed to there being a problem,” Noedgaard said. “We do risk-based supervision, which means we go to places where there are signs there might be problems. We don’t go as often where there aren’t signs of any problems and where the banks are quite small.”

Noedgaard said Toender Bank’s collapse doesn’t raise the risk of more failures. The FSA has 3.2 percent of Denmark’s banks under intensified supervision because of possible solvency issues.

Denmark’s government, which last year became the first in Europe to enforce bail-in legislation that led to senior bank creditor losses, has pushed through five bank rescue packages, including measures to encourage consolidation.

Three regional banks failed the central bank’s latest stress test, published Oct. 25. A fourth bank would be close to breaching capital rules, while the nation’s four biggest lenders, including Danske Bank A/S (DANSKE), all passed.

Nicholas Rohde of Niro Invest Aps., who correctly predicted the failure of Fjordbank Mors A/S, Amagerbanken A/S and Max Bank A/S in 2011, ranks Basisbank A/S, Andelskassen JAK and Sparekassen Lolland A/S as Denmark’s worst-capitalized banks, he said last month.

“We have been through 90 of the 100-plus banks over the last three years, since 2009, and those few banks we haven’t been to are smaller,” Noedgaard said. “Our estimate of 3 percent with potential solvency problems is still valid.”

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

To contact the editor responsible for this story: Tasneem Brogger at

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