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30th August 2011

Danish banking reform

The Danish government has announced a new banking reform plan. This is an amendment to the current plan, generally thought to be the fourth since the major banking crisis. The main change on the last plan is that money can be offered to banks who agree to merge from Financiel Stabilitet, the state organisation originally charged with restructuring or winding down failing banks.


The changes received a positive response from the Danish Bankers Association with its head, Jorgen Horwitz, commenting, "The Danish resolution scheme for winding-up banks has been a costly affair for the Danish banks; we have not been competing on an equal footing with foreign banks and have had to pay more for financing compared to foreign banks. The consolidation initiatives offer the tools needed to reduce the risk of having to wind down troubled banks with the third banking package – and that is crucial in order to maintain a healthy banking sector."


The problems mainly surround the smaller banks who took on to much property lending and are suffering significant losses on some of their agricultural lending. The government took the view following the main banking crisis that it would not bail out the banks in future and therefore any rescue would have to be funded by bondholders and the banking sector. Whilst this was what many countries were saying they wanted to do the fact Denmark did it first had unintended adverse consequences. The fact that senior bondholders lost a proportion of their money (haircut) when Amagerbanken and Fjordbank collapsed led to other banks not being able to raise money through bond or equity offerings therefore leaving them undercapitalised. Denmark has around 120 banks in total many of them very small and part of the co-operative bank tradition. As such the banks have limited capital raising tools they can use.


Given the wish of the government for bank rescue and restructure to be self funded then it is perhaps surprising that Danske Bank should announce that it would not now be repaying the state aid it received early. The bank received DkK24bn, equivalent at today's exchange rate to €3.2bn, £2.9bn, $4.6bn, ¥356bn, Y29.6bn, in state aid during 2009. The bank said that negotiations "showed, however, that an agreement on prepayment on terms financially satisfactory to Danske Bank could not be reached. Consequently, Danske Bank has decided not to prepay the loan early, which can thus be repaid at the earliest in April 2014. The bank had negotiated a change whereby the "the possibility of converting and the obligation to convert all or a portion of the hybrid capital into share capital under certain circumstances is terminated, as is Danske Bank’s option to make interest payments in the form of shares. The total annual payment for the hybrid capital will not change."


Earlier this year the bank increased its capital by nearly DkK20bn and one of the reasons given for doing so was to repay the state capital early. Danske said not to be able to do so was regrettable.