Banking Crisis in Denmark Holds Lessons

European regulators weighing measures to save taxpayers from paying the bill when banks go bust can learn from the crisis in Denmark, where an attempt to share the burden with senior creditors backfired.

The Nordic country, with 5.6 million residents and about 120 lenders, enacted a law in October making it the first European Union member to force senior bondholders to take losses if a bank fails. When Copenhagen-based Amagerbanken A/S collapsed four months later and those creditors took a hit, international investors curbed funding to most of the nation’s banks. The government is still trying to remedy the situation.

As regulators in the EU prepare similar rules to deal with ailing lenders, bankers and analysts say there are lessons to glean from Denmark’s experiment: Don’t impose burden-sharing measures during a crisis, and don’t do it alone.

“The Danish authorities have perhaps been a bit too quick to set up a resolution package,” Henrik Ramlau-Hansen, chief financial officer of Danske Bank A/S, Denmark’s largest bank, said in an interview. “We fully support the idea that the banks should be solid and that you should have strict capital requirements, but it’s extremely dangerous to have different rules in different countries.”

Rewriting Rule Book

Regulators may be taking note. The EU is delaying proposals for senior bondholders of failing banks to take losses in part because the measures may spook investors at a time of market turbulence, two people familiar with the situation said on Sept. 7. Michel Barnier, the EU’s financial services commissioner, will introduce draft legislation on the measures in October at the earliest, rather than this month, said one of the people, who declined to be identified because talks are continuing.

Global regulators are rewriting the rule book for banks after the credit crunch of 2008 led to the collapse of New York- based Lehman Brothers Holdings Inc. and forced governments and central banks in the U.S. and Europe to rescue the financial system at taxpayer expense.

The Basel-based Financial Stability Board, charged by the Group of 20 nations to devise rules for too-big-to-fail banks, is exploring models for dealing with troubled lenders “without exposing the taxpayer to the risk of loss,” according to a July 19 consultation paper. The FSB will discuss responses from national central banks and regulators at its Oct. 3 meeting and plans to submit a final plan to G-20 leaders in Cannes in November. A timeline for implementation hasn’t yet been set.

‘Stable Times’

Jesper Berg, a senior vice president at Copenhagen-based Nykredit A/S who helped write the Danish law while working at the central bank, said the bill exacerbated the country’s banking crisis in part because it was implemented while financial markets were still stressed. The authors had envisaged the rules taking effect only after calm was restored to financial markets, he said.

“Experience shows it would have been better to implement the bail-in package in more stable times,” he said. “The expectation was also that before things got totally out of hand people would be able to solve matters behind doors without needing to resort to a bail-in. That turned out not to be the case.”

Eleven banks have failed in Denmark since the global financial crisis of 2008, Standard & Poor’s said in a July 28 report. Fifteen more are at risk of default in the next three years, the rating company said.

‘Grand Plans’

The same month that Amagerbanken failed, Spar Nord Bank A/S -- Denmark’s fourth-largest listed lender -- was forced to cancel a bond sale as debt investors balked. The bank is now selling about 7 billion kroner ($1.3 billion) in assets to raise money while international funding markets remain closed. In June, lender Fjordbank Mors A/S failed.

The cost to insure the debt of Danske Bank A/S, Denmark’s biggest lender, has almost doubled since February and is about 60 percent higher than Stockholm-based Nordea Bank AB.

“It’s good to have grand plans, but if everything is collapsing, what do you do?” said Jacques Delpla, an economic adviser to French President Nicolas Sarkozy, in an interview. Resorting to bail-ins before forcing banks to recapitalize risks spreading panic and doesn’t address the fundamental problem of too much debt, he said.

Danish lawmakers have since agreed on a package designed to spur troubled lenders to combine and help them avoid resorting to the country’s resolution bill.

‘Poison’ to System

Berg at Nykredit said European plans to shift the burden to senior creditors may cause the same disruptions as those suffered in Denmark, as Europe’s sovereign debt crisis shows few signs of abating and banks’ access to funds is already squeezed.

“As for Europe’s plans to implement similar legislation, financial markets aren’t exactly calm right now,” Berg said. “They’ve committed to pushing this, but it would be poison to the financial system in the region to go ahead with something like this now, given the difficult funding environment at present.”

A measure of banks’ reluctance to lend to each other reached the highest level since April 2009 this week when the difference between the three-month euro interbank offered rate, or Euribor, and the overnight indexed swap rate, widened to 0.78 percentage point.

Denmark’s top financial regulator defended the tougher rules for bank creditors, saying it protected taxpayers and drove out the cheap international funding that led to poor lending decisions and bank failures.

Moral Hazard

Ulrik Noedgaard, director general of the Financial Supervisory Authority, said forcing senior creditors to take losses deals with “the moral hazard issue, that people who provide credit to banks feel certain that they’ll get their money back no matter how stupidly the bank behaves.” He would like to see Europe follow Denmark, though acknowledged it’s a “challenging time to introduce the idea of creditors taking a loss.”

Denmark’s brush with burden-sharing shows financial regulation seldom succeeds unless implemented globally, said Henrik Christiansson, a London-based bank analyst at Citigroup Global Markets.

“Any change that’s material needs to be applied at the same time across all countries, or it moves the problem elsewhere,” he said. “The markets are very global.”

To contact the reporters on this story: Frances Schwartzkopff in Copenhagen at fschwartzko1@bloomberg.net Adam Ewing in Stockholm at aewing5@bloomberg.net

To contact the editor responsible for this story: Tasneem Brogger at tbrogger@bloomberg.net or Frank Connelly at fconnelly@bloomberg.net