Nils Bernstein points to the new role of Central Banks:

Denmark was one of the first countries to introduce a bank resolution scheme, under which those who had lent money to the distressed bank could also lose their investment. This has made headlines, and I am surprised to note that even very small Danish banks in distress still find their way to the pages of the Financial Times. Recently it was a very small bank in the south of Jutland, Tønder Bank. In my opinion, that is out of proportion. Over the weekend another local bank, Sparekassen Lolland A/S (CPH:SPALOL), has been taken over by the larger Jyske Bank A/S (CPH:JYSK) along the same lines, i.e. a private solution.

nils bernstein


Out of proportion? Relative to what?

It is indeed out of proportion relative to Germany raiding Deutsche Bank AG (NYSE:DB) (ETR:DBK) with a battalion of police officers.

On the other hand it is significant to go into details of how the authorities dealt with the situation. Quote:

Central banking has undergone major changes over the last half decade. The financial crisis, which began in 2007 and escalated into a worldwide financial and macroeconomic crisis in the autumn of 2008, has in many ways been a game changer. Not least in terms of the way in which central banks operate. Old paradigms and truths have fallen, and new, in many cases untested, monetary-policy measures have been introduced.

It would be very interesting to a professional investor to see how this fundamental change is working – and working out. Especially in bank inspection, very few countries have had anything to boast about. To the investor, there is not much information in the mere statement that the banks are in the toilet – they sort of know that by now – given they still have funds to invest.

Tonder Bank A/S (CPH:TNDR) is in itself utterly uninteresting, but it might interest the professional investor under which conditions his money might be lost! There is a significant difference between Tønder Bank and Sparekassen Lolland A/S (CPH:SPALOL). In the case of Tønder Bank, the guarantors and recent shareholders did not lose their money, as the prospectus they invested on was more than flawed – let’s be honest: Very close to fraudulent. Sydbanks role in this context remains murky, except they had to cover the loss.

Concerning Sparekassen Lolland A/S (CPH:SPALOL) on the other hand, guarantors lost their deposits, as the dire straits of Spar Lolland had been common knowledge for years – and indeed the published inspection reports do have major caveats:

Of March 23rd 2012.

A severe admonishment as of January 2nd 2012 concerning the 2010 report!

These reports are indeed to be taken seriously and read in due diligence investment decision. Tønder Bank hadn’t been visited for years (which is an indication of how the bank inspection prioritise their time – mom and pop stores are low on the to-do-list) and as such investors could claim good faith.

As banks are trying to recapitalize to meet the 2015 BASEL III targets, investors are likely to be approached – and investors should be perfectly clear that the state is not necessarily going to bail them out for being a damned fool.


In many countries, collateral is restricted to government bonds. Denmark is unique in the sense that we have a very large and well-developed mortgage-credit sector and hence a large volume of outstanding mortgage bonds. These bonds may be pledged as collateral for loans from Danmarks Nationalbank in the same way as government bonds. But it is still uncertain to which extent they may be included in the liquidity reserves of the banks in future.

And it just might be of some passing interest:


Danmarks Nationalbank has on several occasions expanded the collateral basis for borrowing by banks. Some of the measures were temporary and applied only at the peak of the crisis. For example, Danmarks Nationalbank has expanded the collateral basis to include banks’ lending of good quality. This has also improved the liquidity of the banks’ balance sheets.


It is not likely that Danish banks will be able to raise the necessary capital on the market. Furthermore: Deposits are not particularly welcome!


Uncollateralised lending in the money market, which was common prior to the crisis, has all but vanished in favour of collateralised lending. The banks also need to pledge collateral when borrowing from central banks. All this has increased the need for collateral in banks.

This is perhaps as blunt a statement as you can get from a Central Bank CEO. There is not going to be a “restoration of confidence” in the financial sector any time soon, and anybody with half a brain knows it.

The other part is that banks will not be able to freeze credit and call home loans – as these loans are to be held in reserve for use as collateral.

In my view, the case studies of Tønder Bank and Spar Lolland are central guidelines to the investor.