Denmark has labelled all of its major banks as (Systemically important financial institutions) SIFIs or as many would term ‘too big to fail’. Denmark will likely up the capital requirements for its largest banks. The SIFI report lists the major Danish banks including, Danske Bank, Nykredit, Nordea Bank Danmark, Jyske Bank, BRFkredit and Sydbank
This is just the summary. The full report is intended to be translated into English and might be found on the ministry’s home page – eventually:
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None of them are strangers to my regular reader, as I have missed few opportunities to post snide remarks on their machinations.
There are indubitably a lot of objective quantitative reasons for the appointment to the SIFI status – which the report goes into in considerable detail. The real reasons are probably simpler:
– Danske Bank – being over half the Danish financial sector – is very hard to avoid.
– Nykredit – is the largest real estate mortgage bank with a deliberately confusing un-ended merger with Totalkredit. Totalkredit was the real estate mortgage bank owned by the regional banks and it has used the regional banks as a distribution channel with resulting devastating financial involvement in that disaster.
– Nordea Bank AB (STO:NDA-SEK) Danmark – is the odd man out, as it is ultimately a Swedish (partially) state owned bank. It is thus primarily a problem for the Swedish state and a bone of contention between Denmark, Sweden, the EU and ECB involving three different currencies and Central Banks.
– Jyske Bank – is a pretentious provincial jerk that not only is in a deep mess with agricultural and real estate development loans; but is an active player in the international casino of SWAPS, securities – you name it.
– BRFkredit – has specialised to its feeble ability in the most hopeless part of the Danish real estate market as a mortgage bank: Copenhagen condominiums, priced as mansions with unemployed students with families as “owners” – in high crime areas of the city.
– Sydbank A/S (CPH:SYDB) (OMX:SYDB) – the proverbial garbage can of failed banks the last forty years. An educated guess would assign the worst and most consistently bad credit quality in Scandinavia to it – seeing that it has participated in all bank reconstruction it possibly could. A sort of Danish Bankia on Prozac. The summer cottage of Canute the Great is probably still on its books and despite the late majesty’s permanent residence in Winchester Cathedral possibly still is a highly esteemed client.
Well there MUST be some reason for including Sydbank A/S (CPH:SYDB) in anything important!
Now that list of challenges is enough to make strong men weep. But what is Denmark’s plan?
The main difference between a SIFI and a non-SIFI is that the SIFI has higher capital requirement before authorities take action. Whereas a non-SIFI can decline into a position when solvency relative to the risk weighted assets decline below 8% before being dissolved, the SIFI has higher capital requirement of 13% plus an individual addition (probably due to the books being cooked rare, medium or well done?) before the authorities take action. Four phases are described:
– Prevention: A bit late for that, but generally involves planning for a crisis and strengthened supervision by authorities – an admission of a flawed bank inspection.
– Capital preservation: Which has such instruments as limitations on:
- Interest payment on Tier 1 capital
– Recovery: Where:
- Convocation of general meeting
- Replacement of members of the management board and the board of directors
- Limitation on Interest payment on Tier 2 capital
– Crisis Management: Where equity has been lost:
- Conversion of crisis management buffer (5 pct.) to Common Equity Tier 1
- The crisis management authority takes control and ownership and management is partly or fully replaced.
As any involvement of the authorities generally quickly reveals the situation much worse and the reports having only the haziest relation to reality, the interesting part is the crisis management tools.
The negotiations with the ECB on bank union were an attempt to pull a sleight of hand and reduce the risk weighted assets by upgrading the flexible interest mortgage bonds to sovereign status. An attempt that failed miserably, as the ECB wanted something more substantial than the opinion of the Mortgage Bankers Association. The only thing achieved was jeopardising the validity of the fixed interest annuity. But then again the banks couldn’t care less, as they are all in the possession of investors and the only thing left are their own flexible interests short no service on principal term junk backed by overvalued inner city cells.
Even attempting pulling a fast one was irresponsible as the mortgage bank had been warned years ago against precisely that move. And to think that might get past Jörg Asmussen of the ECB is not only irresponsible; but downright stupid. The only thing the mortgage banks have achieved is signing their own death warrant.
In crisis management the shareholders are not taken into consideration, as equity must be assumed to be lost. Officially the general assembly must ask nicely to be kicked out; but in substance there is a complete state takeover.
The tools of the trade:
– Bridge bank: To sell off assets to a bank partly or wholly state owned. For the purpose of onward sale of assets.
This is particularly interesting in two relations:
- The government growth plan foresees the establishment of a business bond institute for small and medium businesses that has two options:
- Converting high quality bank business collateralised loans into bonds for the direct sale to investors.
- As a credit facility to new loans with proper collateral to work around the banks continued credit squeeze on small and medium businesses.
This would more or less permanently remove investment loans for even the segment they claim to service: Small and medium businesses. The large companies have always had access to the bond market. But this could not only provide access, but also lower interest rates to businesses, provided of course the default risk is carried by the debtors in solidarity, as they could substitute short sovereign bonds.
- The other major issue is what to do with the healthy part of the real estate mortgages. If the mortgage banks could establish a bridge bank the fixed interest annuities could be sold off to a different company without too much impairment.
In this context a brief announcement to the Copenhagen stock exchange that the RealDania fund had sold its shares in Danske Bank A/S (CPH:DANSKE) (PINK:DNSKY) could be interesting, as that fund was the original owner of Realkredit Danmark.
– Sale of assets directly to another bank with a permanent licence and thus not a bridge bank. This could be interesting in the devolvement of Danske Bank A/S (CPH:DANSKE) (PINK:DNSKY) activities in Sweden and Nordea Bank AB (STO:NDA-SEK) Danmark activities in Denmark. A relationship that is a pest to both Nationalbanken and Riksbanken. This of course needs the assets to be of comparable substandard – and the exchange rate stable and reasonably fair. This would mean stability in the exchange rate between the SEK and the EUR.
– Stability fund or ”asset management vehicle” that allows the selloff to a state owned company of impaired assets with a view to sell off these assets. This is particularly interesting as developers are kept floating simply because the creditors can’t agree to take losses, thus leaving tenants in a limbo.
– Debt write down or conversion of debt equity – without it specifically being mentioned in the debt instrument:
- Open bank: With the aim of reconstructing the distressed bank
- Closed bank: Where assets are sold off to a bridge bank at realistic value – the normal trash can solution.
It is hard to see the ECB recognising the fixed interest real estate annuity as being of equal rank as sovereign bonds. The priority of Nationalbanken is to save the real estate annuity. Those of us with medium term memories will recall that the newly appointed CEO of the CB Lars Rohde in a television debate with CEO of the Mortgage Bankers Association Ane Arnth Jensen a couple years ago – when he was still the CEO of the ATP pension fund – as his outgoing remark said that his concern as an investor was the viability of the real estate mortgage convertible annuity.
He specifically did not mention the viability of the mortgage banks.
It is hard not to see his appointment as Denmark’s CB CEO in this light!
We also see, that the governments “Growth Plan” (though being a mixed box of chocolates), the attempts to save the mortgage bond while joining the EU Bank Union and the committee report on the SIFI are anything but haphazard neither in contents nor in timing nor in order.