It has been a somewhat”emotional” weekend in Danish small-banking. Two banks have been merged with others pair wise. One of them followed hard on the heels of another fusion. This happens only a scant month after another fusion following the same pattern. I won’t name names – not out of delicacy; but simply because these banks are utterly obscure.
The techniques are what could have interest.
The general problem for these – in international (and national for that matter) context midget banks – is threefold:
- There has been an overexposure to the agricultural sector where massive overpricing of agricultural land has been accompanied by overinvestment in production apparatus.
- As a result of the farmers desperate situation they were encouraged to play the market – interest swaps in CHF seemingly the preferred method for financial suicide – with predictably disastrous results.
- Loans to developers – generally far outside the comfort zone of sanity and geography. Investing in the German housing developments? By a rural hick-bank? The official term was “diversification” as a euphemism for playing the baccarat table without knowing a knave from a king.
Nobody seems to have stuck to one way of perdition, but in ill-conceived attempts to save themselves have only landed them in deeper trouble.
What has been done from the Bank Inspection is to prescribe values for acreage on farmland and a value on developer properties consistent with realistic future rent income. The difference between book value and near-sanity evaluation has then been demanded impaired.
This took care of equity and junior deposits – leaving some of the worst excesses in the financial trash can (Finansiel Stability). The remaining deposits and loan have thus been guided into a reasonable administrative framework that does not take the usury interest Finansiel Stabilitet is forced to take so as not to compete on uneven terms with the rest of the banking sector.
Sorting out problems.
What has been achieved according to the latest legal solution, where FIH offloaded their bad debt to Financiel Stability in impaired condition and a temporary holding tank for bad agricultural debt was made (a dustbin with a dustbin), is:
1) Some of the wild speculative losses have been taken and they can be shut down. This is in accordance with the EU Stability Pact where each country is supposed to take control of their own banks thus preventing complications: Keep amateurs off the premises of the Casino.
2) The possibility of sorting real estate developer losses and agricultural distress into separate boxes.
- The developers have to be consolidated and taken out of the Gordian knot these loans have tied themselves into where several banks with different seniority of their loans have the same physical property as collateral – thus blocking impairment and sale at a realistic price.
- The agricultural bad debts send into a holding cell. This problem will have to be addressed at a later stage, when some sort of overview has been established.
3) A phasing of the financial meltdown where the powder keg has been portioned off into small pans that can be burned separately.
4) Prevented the mortgage banks (In these cases it is most probably Nykredit – simple process of elimination) from withdrawing the deposit they made to keep these small banks afloat. This is absolutely necessary for the mortgage banks, as these small banks have guaranteed the outer tranches of the real estate loans. Guarantees that are worthless in case the banks default.
5) The interbank market has definitely broken down with well founded distrust among banks. The cash deposits in the CB are a staggering 40 bio. USD – more than the national debt of Denmark. If banks can’t cooperate then force surplus lending and surplus deposits together and cancel out the necessity of CB bookkeeping.
6) There is a hope that the end of april can come without the more or less habitual panic at the end of a month.
What remains to be done?
- Recapitalizing these shotgun marriages. These actions have removed equity from the banking sector (In a small way). There has been forwarded no convincing explanation of how new shareholding capital is to be raised – but that is next month problem.
- These merged banks are not halfway viable but they can be kept sort of alive with artificial respiration for the time being. But it seemingly has been prevented that some of the larger provincial banks – trying to get out of their own desperate situation – from growing “to big to fail”.
- Continuing the consolidation of developers losses so the real estate can be sold off to pension funds that can administrate the running of rental property: But there is a long way before pension funds can make a viable investment out of the debris. It will be done one housing block at the time.
- The agricultural sector is only nearer to a solution in so far, as some of the worst cases have been quarantined off in their cozy little dustbin.
- The problems of the mortgage banks are nowhere nearer a solution, neither are the major banks. But when the next crisis arises there it might be dealt with without the interference of desperate farmers literarily offloading dung on the parliament’s doorstep: Do you have any idea how much manure 5 million pigs produce every day?
- The homeowner’s insolvency and illiquidity is another postponed problem where the next appointment with panic is end of June.
That is crisis management: A long march accomplished one step at the time – hopefully without stumbling in the minefield.
Popular resentment and political resolution is not helpful at the moment. The major problems are separate from this – and it is the aim of keeping it that way. Civil servants of the central administration is regularly in hot water for being lazy and overpaid – but in how many cases is it the pot calling the kettle black?
If you have sprung a leak: Keep pumping!