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Thursday, July 7, 2011

Danish government uses lack of disclosure to drive consolidation

Bloomberg carried an article on how the Danish government is trying to drive consolidation in the banking sector while re-introducing the idea that investors take losses.

Denmark has a number of banks that face the challenge of refinancing government guaranteed debt.  In the absence of current asset and liability-level disclosure, investors cannot evaluate the risks of these banks.  As predicted under the FDR Framework and shown by the higher funding cost the Danish banking system is facing, investors are reluctant to invest.

As a result, the banks are stuck between a rock and a hard place and will be forced to find buyers on terms that are very attractive to the buyers.
Denmark’s banks face a decline in earnings as the fallout from Europe’s toughest resolution laws sends funding costs higher in the Nordic country, Moody’s Investors Service Senior Vice President Janne Thomsen said. 
“We are worried about the loans to farmers, still worried about commercial real estate and we are also worried about the earnings of the banks because funding is going to be, and has shown to be, much more costly than it was in the past,” Thomsen said in a telephone interview yesterday. 
The June 24 failure of Fjordbank Mors A/S, a regional lender with about $1.4 billion in deposits, underlined the state’s commitment to resolution laws that force senior creditors to share losses, Moody’s said yesterday in a note. 
The government’s goal of avoiding more insolvencies by encouraging consolidation is so far proving “elusive,” the company said. 
... Denmark isn’t planning further measures to support troubled lenders which involve taxpayer funds, Jacob Jensen, a spokesman for the ruling Liberal Party, said in an interview last week. Doing so would send the wrong signal, given that it’s only “a few small banks” that are in trouble, he said. 
... The country’s healthy lenders, which were forced to provide as much as 35 billion kroner ($6.8 billion) in 2008 to get a state industry guarantee, don’t want a repeat of that bill and will only buy troubled peers if such a move makes financial sense, said Karen Froesig, chief executive officer at Sydbank. 
“My plea would simply be that we don’t make it a general package which requires commitments from all banks,” Froesig said in an interview last week. “I don’t think bank rescues should be funded by the taxpayer, but I also think it’s a problem that there’s an expectation that the rest of the sector steps in to rescue the weaker links.” 
Vagn Thorsager, chief executive at lender Aarhus Lokalbank A/S, said his bank would consider taking part in a consolidation in 2013. He said the government will need to do more to support the industry to avoid more bank failures and allow for mergers. 
“There are a number of us, we are weaker banks, who are fighting in order to survive and follow our action plans,” he said by phone today. “I’m fairly sure we will be able to meet our action plan and survive, then we can think about taking part in a merger in 2013.”
Jens Borum, a spokesman at Jyske Bank, said the lender will not be an active in a consolidation of the industry.

In the end, Denmark’s financial industry can’t avoid consolidation, Thomsen said. Troubled lenders will need to consider looking for buyers as they face refinancing deadlines that collide with the withdrawal of the state guarantee in 2013, she said. 
“There is a large number of banks that have to refinance government guaranteed loans and they may have some problems getting this in place,” Thomsen said. “We think that consolidation will happen.” 

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