The meltdown of Denmark’s Banking System


The meltdown.

The Danish Central Bank announced towards the end of November 2011 that they would extend loans with security in “good” bank loans. Since then they have had some trouble finding out what that is these days.

On the 16th of January 2012 the Central Bank specified what they meant with credit facilities (not “good” loans):

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1)      A maturity of 3 years.

2)      Interest: Central Banks 7-day lending rate (p.t. 0.3 %) plus a surcharge of nothing – at least until 31st of June 2013.

3)      Unlimited drawing against security.

Truly generous terms. But why?

1) For starters: Note that the secured 3 month interest rate is above the unsecured 3 month interest rate at the beginning of November 11. That provokes three drops in the deposit rate of the Central Bank within 1½ month. There was some disturbance concerning Greece and Italy – but to ascribe these factors any significance belies the very low exposure of Danish banks to these countries. (Red lines).

2) The unsecured interbank rate seems to have parted company for good with the Central Banks deposit rate. (Blue lines).

3) Tomorrow/next has followed CB deposit rate fairly accurately – as it should. (Green line)

This probably is a rather classical portrait of a credit crunch. Banks do not lend each other money – not even for profit – and are getting pretty critical of songs and dances.

It is definitely not because there is a lack of liquidity!

a)      Deposit in the Central Bank reaches – and stabilises at around 150 billion DKK. (Fat lines)

b)      Interest rates drop – sovereign bond got very pricy. Some of the really short sovereign bond went into negative interest territory. (Dotted lines).

c)       Still the Central Bank advanced “somebody” with 20-24 billion DKK (Red fat line).

A word of caution: The secured 3 mths interest rate stopped being published by the Central Bank on 26th of November. It only recently returned – and was revised back to 1st of September. Revised to follow the CB deposit rate – MUCH nicer. But the unrevised and updated rate has been used here.

So we can be pretty sure it is not ALL banks that are in the doghouse. As to which bank is the culprit there are some clues:

A)     First of all banks needing an “advance” of around 20 billion DKK on the last day of the year has to be pretty big.

B)      On the 30th of December pensions and wages did not appear on the bank statements of the recipients, as they should have – not in time at least. It caused some nationwide concern. A bit of unscientific, flatfooted police asking around has resulted in the finger being pointed in the direction of Danske Bank. Later in the day the money came through.

The explanations varied during the day:

a)      A clerical error (which was refuted in several comments on blogs that day).

b)      Once a month normal clearance of accounts with the Central Bank is suspended. All banks have to pay up the full transferral amount to the Central Bank. And not all had transferred enough.

Any 10 year old schoolboy could have come up with a more descriptive and convincing story; but it sort of excludes the possibility of being an error anywhere else but in a bank – and only one bank. The same “clerical error” on the same day by different banks? That hypothesis lacks credulity!

C)      Furthermore the state controlling authority (Finanstilsynet) had announced that it would be particularly observant at the end of the year (as if they wouldn’t always be? Well, with the track record of Finanstilsynet the emphasis is not superfluous). If I were a bank manager I would make pretty certain not being caught out – and would personally supervise the proceedings.

An “error” does not explain the advance.

We can thus be pretty certain that Danske Bank had a distinct lack of cash on the last day of the year. A hypothesis that can be confirmed or denied, when Danske Bank’s annual report is published. Misplacing 20 billion DKK?

These events point to:

1)      Danske Bank not being creditworthy in the normal sense of the word. Illiquid is perhaps the term.

2)      The unusually long maturity of the new lending facility indicates that it is not a passing embarrassment. Normally the Central Bank does not lend out for more than a week at the time.

3)      Back in November the Central Bank manager did observe at the announcement of the new credit facility that “good” loans would have to be named individually and not in a lump sum.

This has been a standing issue with Finanstilsynet: Danske Bank use a model (involving among other things unemployment) to make loss depreciations. Finanstilsynet has not been impressed by the method.