It is all over the Danish Papers that FIH Bank (FIH=Finansieringsinstituttet for Industri og Håndværk) is offloading 15 bio DKK of bad loans to real estate developers to Finansiel Stabilitet (the state rubbish bin for dead loans and deceased banks).

There is a lot of confusion – though there shouldn’t be: It is really quite simple. Denmark is not a special case, but is interesting because the pathology of the banks is rather similar.


  • FIH was an old bank and mortgage bank specialising in financing industry and small businesses that to all intents and purposes went belly up a couple of years ago.
  • As it went wrong under the first unlimited state guarantee, it was taken over by pension funds: ATP and PFA at a price, which recognised that there was very little equity left – very little. Further more substantial loans were granted by government to tie them over till 2012 and 2013.
  • Immediately the other major banks started howling about socialism and government ownership – not withstanding that Danske Bank was the main benefactor of the panic measures taken in 2008. Finansrådet (the banks trade association – and the crash test dummy of Danske Bank) being both vicious and totally incoherent in their arguments. The fact of the matter was that ATP had bought a second hand gun (slightly dented) and was preparing to set up an army of its own.
  • That was blocked by Danske Bank – ATP could not take over PFA’s share – put the secretary of economics in a precarious position. Actually ATP is owned by the employers and trade unions, thus not state owned.

The Governments plan was to make the pension funds swallow the losses and thus prevented ATP from operating as a bank. ATP was thus abused by the banks and government – as CEO of ATP Lars Rohde stated: “We can’t drag the  Government into small claims court!”

But if they thought that ATP would just lie back and enjoy the rape – they had another thing coming.


  • The problem was/is deposits, as FIH had financed developers (in Denmark and Germany) huge amounts and re-financed them at the interbank market. When that market froze over in 2008 FIH was severely strapped for cash. The emergency loans helped, but they were of limited duration.
  • Since then FIH has been doing what they could to raise deposits with interest rates of 3½% under the small depositors’ guarantee of ¾ mio. DKK compared to a sovereign bond interest rate of 1-2%. You could actually earn money by taking out a loan in your house and deposit the proceeds in FIH.
  • But 40 odd billion DKK is a lot of pennies to most households, so nowhere near enough has been raised.

FIH has taken the impairments they could to bring down the price (final price settled after 2 years) that their shareholders have to pay. The situation had drawn the attention of the rating agencies and FIH was rated pure junk, so blocking the loan market for FIH. This means there is no way out but to “slim the balance” further. The prime target has since new year apparently been the real estate developers.

Loans to developers:

  • Now the real estate developers financing of their hopeless projects is one great mess with 20 different banks being involved in each of the developer’s project – and with no consistency. A bank may have first priority in one project and fifth in another. So the result is that all the banks just sit tight and hope for better times.
  • The reason is simple: If one bank calls home their loan and take the loss the house of cards is brought down with the result that large number of properties have to be sold at distress prices – which will slash the general price level for housing.
  • As the major banks are also mortgage banks the security behind all their mortgages will evaporate and their bonds can only be bought by the banks themselves.
  • The bank that starts the avalanche might get lucky and only loose the most precarious loans – that is apparently the tactic of FIH: Call home the impaired loans. This will force the other banks to take over the bad loans and service the good loans.
    The truth is now revealed: The other banks are already severely over stretched and cannot raise the money to pay off the bad loans of FIH.

The threat to the State is:

If it does not take over the bad loans – thus relieving FIH’s shortfall in deposits – the whole banking sector comes tumbling down partly due to forcing the other banks to take losses as they probably have advanced loans to their colleagues that have good security – far under a Loan/Value = 1 position. And we all know the other banks can’t or won’t raise that amount of cash.
The alternative is for FIH to file for bankruptcy and load the other banks and the dustbin Finansiel Stabiltet with dead certain losses. The shareholders of FIH will suffer the minimal loss of their equity. That might actually be cheap – because that would mean that the pension funds will get cheap real estate investment properties.

This has Finansrådet (in effect Danske Bank) crying their eyes out: The State should also take over our bad loans. Danske Bank is in effect begging to be nationalized.

That might very well happen; but if the bad loans are transferred to Finansiel Stabilitet – the bank would still have to guarantee. If they are nationalized the shareholders will loose every penny.

ATP and the other pension funds don’t care too much. The odd billion DKK purchase price for FIH is a loss that can be taken, but it will saddle the major losses on the state – and the other banks.

What will happen?

Probably what has been agreed upon between FIH and Finansiel Stabilitet:

  • The 15 billion in bad loans will be taken over from FIH, where FIH guarantees for the loans.
  • Danske Bank will have to slither back – and be killed by the flexible interest no service loans that are so abundant – here prices cannot be controlled to the same extend.

There are so many angles to this – all of them unpleasant.

(Update Feb 24 2012)

The parliamentary committee will next week be presented for the following proposal of transferring the real estate development loans to Finansiel Stabilitet (States funeral home for dead banks) according to

  • The arrangement is open to all banks.
  • FIH will transfer equity of 1.5 bio. DKK to cover loans of 15 bio. DKK.
  • Furthermore FIH will guarantee with their full equity of 7 bio. DKK.

Brilliant masterstroke: The arrangement is open to everybody else in principle – and totally useless to them.

The fundamental problem with Danish banks is their shortage of equity (i.e. losses not taken). FIH has no such problems – if for no other reason: ATP and PFA pension funds own FIH.

This reveals the shakiness of the (Danish) financial sector: The general problem of undercapitalisation is – if

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