Denmark’s financial regulator plans to take an aggressive approach with banks that do not meet new rules designed to protect taxpayers.
“We need to act a lot earlier than we have acted,” Danish Financial Supervisory Authority (FSA) Director-General Jesper Berg said in a telephone interview.
As a regulator in the first European nation ever to force losses on senior bank creditors, Berg said Italy’s plight with Banca Monte dei Paschi di Siena is proof regulators cannot afford to wait when capital levels test lower limits.
The same conclusion can be drawn from Denmark’s own experiences during the financial crisis, he said.
Denmark is taking an aggressive tack amid a lack of clarity over what regulatory action a breach of minimum requirements for own funds and liabilities (MREL) should trigger. The rule is the linchpin in Europe’s plan to avoid government bailouts of banks, but according to the European Banking Authority (EBA), the legal framework in question does not specify what steps local authorities should take.
The EBA last month said the options that authorities have are generally “too slow” or “too uncertain,” creating “practical enforcement problems.”
The EU has since proposed expanding regulators’ powers.
Berg said history shows it is wise to err on the side of caution.
“From the cases we had over the last couple of years there have been huge losses to simple creditors, so we need to act a lot earlier,” he said.
Danske Bank A/S and a handful of other Danish lenders deemed to be of systemic importance to the domestic economy must hold MREL equal to almost a third of risk-weighted assets. As well as the existing stack of capital requirements, MREL will include recapitalization and loss-absorbing buffers.
If a Danish lender eats through the thin top layer of its MREL reserves — and breaches the recapitalization buffer — the FSA is “of the view that we can at that stage actually transfer institutions to Financial Stability,” the nation’s bad bank, Berg said.
Experience shows that waiting means “there won’t be enough money,” he said.
Denmark’s biggest banks last year all passed the EBA’s stress tests as Scandinavia outperformed much of the rest of Europe on capital adequacy.
Berg ruled out the kind of precautionary recapitalization that Italy is planning for Monte Paschi after other efforts to support the world’s oldest bank fell short.
“Anything that smacks of the government taking losses, or the risk of the government taking losses, is not part of the government’s strategy” in Denmark, he said.
Denmark’s tough stance might prompt struggling banks to seek mergers instead, as was the case more than 20 years ago, when the FSA had a similar policy, Berg said.
“We want to get back to the early ’90s,” he said.
The biggest Danish banks face a 2019 deadline to comply with MREL, which the FSA said will need to be equivalent to 30 percent of risk-weighted assets, or twice total capital requirements.
Under the FSA plan, even smaller lenders will face a requirement that exceeds minimum capital demands to avoid what the regulator has characterized as “messy” unwindings in bankruptcy court.
“You can just look at Italy right now to see the need for another approach,” Berg said. “The underlying assumption that you can use bankruptcy for small and medium-sized bank is, practically speaking, unrealistic, and we have the experience to show it.”
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