I’ve just had occasion to look into the IMF:
DENMARK STAFF REPORT FOR THE 2012 ARTICLE IV CONSULTATION
Seth Klarman: Investors Can No Longer Rely On Mean Reversion
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Dated: December 20, 2012
From what I’ve been able to skim, the report is very useful for insomniacs. But what caught my attention was the authors of the report.
Discussions took place in Copenhagen from October 25 through November 5, 2012. The staff comprised Mr. Dorsey (head), Mmes. Batini, Mordonu, Xiao, and Zoli (all EUR). Mr. Andersen and Ms. Pedersen (both OEDNO) joined parts of the mission. An advance team led by Ms. Batini and including Ms. Xiao visited Stockholm on October 24 to discuss cross-border financial sector issues.
They did WHAT?
The reason I looked into it was this report from the Danish Bank Inspection:
Account of inspection A/S (management and control in the credit area)
Now the interesting part is not the flagrant non-compliance with credit risk procedures; but the dates! The report is published April 19, 2013, but the inspection took place in October 2012 – why the delay?
Also on April 19, 2013, Danish CB submitted an official response to the Business and Growth Ministry’s report on “Systemically Important Financial Institutions” (SIFI). I quote the concluding remarks:
… As noted in the report, it can be appropriate to await the formulation of the European framework before defining the implementation in Danish legislation. This is to ensure that Danish SIFI’s crisis management will be according to the same rules as other European banks.
Now, what do we have?
Well the Bank Inspection visited Nordea Bank AB (STO:NDA-SEK) in October 2012 and those with a mind for trivia might recall a great deal of fuss in the Scandinavian pond concerning Scandinavian Airline System, where the major bank Nordea Bank AB (STO:NDA-SEK) threatened to call home loans unless the three Nordic governments paid in more capital to the airline – which the governments refused.
Now we learn that during that altercation, the Finance Inspection was sitting on the banks back asking questions as to how they arrived at granting credit.
Not only that, but the IMF was deeply involved as well with “cross-border financial sector issues”. By necessity, this must have dealt with the problem that Nordea is a part state-owned Swedish bank and is the second largest in Denmark as well, and Danske Bank A/S (CPH:DANSKE) (PINK:DNSKY) is as large in Sweden as Nordea is in Denmark (give or take). Both SIFI’s in Denmark.
Neither Denmark nor Sweden has joined the European Bank Union – Sweden will not and Denmark has reservations concerning the real estate mortgage bonds. Nevertheless the CB CEO concurs with the Ministry’s opinion that SIFI issues should be resolved in a European context.
This context means that each country is liable for its banks – even abroad in another EU country – disregarding the currency issue. It might be stretching the evidence presented; but as far as I can see, the “cross-border financial sector issue” must include some sort of swap between two very unwilling banks.
My guess – and it is a guess – is that Danske Bank A/S (CPH:DANSKE) (PINK:DNSKY) and Nordea Bank AB (STO:NDA-SEK) are going to be repatriated each to their own country, snd it will be done according to the European Bank Union standards.
There are major problems with that:
a) What standard of credit quality is to be used?
b) What exchange rate between DKK and SEK is the appropriate?
This disentanglement is likely to take a very long time.