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Denmark: Call to Bail out of Strict Bail-In Policy

(Apr. 9, 2013)

It was reported on March 26, 2013, that <?Denmark is reconsidering its "bail-in" policy towards lending institutions, in the aftermath of having lost 23% of its banks as a result of a real estate bubble that burst in 2008. Since that time, about 12 regional banks have been taken over by the state resolution agency, with an equal number absorbed by stronger competitors; the failures were limited to local and community banks. (Frances Schwartzkopff, Denmark Reviews Bail-In Law as ‘Terrorists’ Shape Banking, BLOOMBERG (Mar. 26, 2013).)

A “bail-in” refers to the forfeiting by bank depositors of part of their investment before the government (i.e., taxpayers) would have to step in to bail out the bank, thereby “bailing in” a bank that otherwise could face bankruptcy. (Bail-In, FINANCIAL TIMES LEXICON (last visited Apr. 3, 2013).) Two years ago, Denmark led the way for the rest of the European Union in providing for bail-ins for lenders. (Schwartzkopff, supra.)

In 2010, Danish legislators had pledged not to bail out the country’s banks, after having taken unprecedented measures to support financial institutions following the global financial crisis of 2008. However, not long after the passage of bail-in legislation in 2011, two regional banks failed, resulting in “most of the nation’s banks [being shut] out of international funding markets as investors balked at the prospect of losses.” (Id.; see also Lov om ændring af lov om en garantifond for indskydere og investorer, lov omfinansiel stabilitet og ligningsloven [Law on the Amendment of the Law on the Guarantee Fund for Depositors and Investors, the Financial Stability Act, and the Assessment Act], Law No. 619 of June 14, 2011, RETSINFORMATION.) In response, the government adopted two additional banking measures to encourage bank consolidation and ease pressure on bank loans. (Schwartzkopff, supra.)

New Recommendations to Improve Financial Stability of Financial Institutions

The Committee on Systemically Important Financial Institutions (SIFIs) in Denmark (the Committee) was established by the Danish Minister for Business and Growth on January 12, 2012. Its task was to consider “criteria by which banks and credit institutions should be identified as being systemically important financial institution (SIFI) in Denmark, requirements that these Danish SIFIs should meet, and how Danish SIFIs in distress should be handled.” (The Committee, SYSTEMICALLY IMPORTANT FINANCIAL INSTITUTIONS IN DENMARK: IDENTIFICATION, REQUIREMENTS AND CRISIS MANAGEMENT (Mar. 11, 2013), at 4, Denmark Ministry of Business and Growth (Erhvervs- og Vækstministeriet) website.)

The Committee made its recommendations public in March 2013, calling for additional requirements concerning the capital and liquidity of Danish SIFIs and for new tools that “aim to provide the best possible basis for carrying out crisis management [of SIFIs],if … necessary, with as few harmful effects on the economy as possible and without costs for the state.” (Id. at 8; see also Press Release, SIFI-Committee Recommends Additional Requirements for the Largest Danish Banks (Mar. 14, 2013.)

One option the Committee recommended would be to permit the government to save banks without creating incentives for them to take excessive risk, SIFICommittee Chairman Michael Moeller was quoted as saying. In his view, “[t]ighter oversight, earlier intervention by the Financial Supervisory Authority and higher capital requirements would minimize the risk of moral hazard … . So would a requirement that senior unsecured creditors accept the risk of losses or conversion of their bonds into equity.” (Schwartzkopff, supra.)

Moeller further commented that in worst-case scenarios none of the stakeholders –shareholders, hybrid capital owners, and large depositors – can be certain of not losing money; he noted that Denmark has emphasized this position “more than any country in Europe.” He acknowledged, however, that “if you said that you would never save a bank, nobody would believe you.” (Id.) The SIFI Committee called Denmark’s six largest banks “too big too fail,” meaning that the banks “need to set aside as much as 5 percentage points in additional capital.” (Id.) Some other SIFI recommendations are to give the regulatory authority broader powers and to require banks to contribute to a fund to finance potential bailouts. (Id.)

In justifying the recommendations, Moeller stated, “[w]e need another set-up where we have even more tools than we have now … . We want to keep options open because when you have something that is very seldom [sic], it’s not very good to have a fixed plan that you have to use for everything.” (Id.)

The public has until April 19 to comment on the proposals, which will then be submitted to the Parliament. In the meantime, the opposition Conservative Party has already indicated it will try to block the proposal for higher capital requirements, and the Danish Bankers Association contends that the measures would put an economic recovery at risk by forcing banks to cut lending. (Id.)