The Danish experience : Why did more than a third of banks disappear and how was it handled? FINANCIAL SATEFY NET CONFERENCE 2015 JESPER RANGVID C H A I R M A N , D A N I S H F I N A N C I A L C R I S I S C O M M I T T E E P R O F E S S O R , C O P E N H A G E N B U S I N E S S S C H O O L Financial crisis in Denmark. J. Rangvid (CBS)
Number of banks in Denmark 175 150 125 Banks transferred to Finansiel Stabilitet. 100 Banks receiving capital requirement from FSA, but private solutions found. 75 Other banks ceasing existence 50 2008 2013 Financial crisis in Denmark. J. Rangvid (CBS)
Why a financial crisis in Denmark? 3 Financial crisis in Denmark. J. Rangvid (CBS)
Risk in Danish financial sector before the crisis 4 DKK bn DKK bn Deposits Deposit Lending deficit Financial crisis in Denmark. J. Rangvid (CBS)
Example of a bank ceasing existence 5 2003 2004 2005 2006 2007 2008 2009 Lending (bn DKK) 7.1 8.3 13.3 18.3 24.7 25.7 23.9 Large commitments, % of Tier 2 194.7 219.9 470.5 294.5 349.1 416.3 180.4 Commercial property exposure 16.5 22 24.8 27.6 34.7 40.7 38.5 Deposit deficit 0.9 1.0 1.2 1.4 1.6 1.8 1.8 Return on equity 22.7 27.8 39.4 36.0 22.7 -39.5 -35.5 Financial crisis in Denmark. J. Rangvid (CBS)
Lending to 17 specific customers in failed banks 6 Total lending 2007 Selected loans Impairments 08-11 / Mio. Mio. Lending 07 Roskilde Bank 44972 12003 49.6 Amagerbanken 27246 6029 58.2 Fionia Bank 25980 1010 56.5 Fjordbank Mors 13390 346 108.7 EBH Bank 9525 323 263.7 Max Bank 8163 295 54.2 Eik Bank 8001 514 53.3 Sparekassen Østjylland 7593 - Gudme Raaschou Bank 4861 552 3.4 Totalt 149730 21072 73.9 Financial crisis in Denmark. J. Rangvid (CBS)
How was the crisis handled? 7 Financial crisis in Denmark. J. Rangvid (CBS)
Bank packages in Denmark 8 Bank package I General state guarantee lasting until - (The Stability Package ) September 30, 2010. - October 5, 2008 Bank package II Capital injection (Tier 1) from the State - (The Credit Package ) and Individual state guarantee. - January 18, 2009 Bank package III Haircut on unsecured senior loans and - (The Exit Package ) deposits above EUR 100,000 - June 25, 2010 Financial crisis in Denmark. J. Rangvid (CBS)
Bank package III 9 Timeline of transfer Assets and liabilities of failing bank Source: Danmarks Nationalbank Financial crisis in Denmark. J. Rangvid (CBS)
Amagerbanken …. or Armageddonbanken 10 aaaaaa aaaaaa aaaaaa aaaaaa aaaaaa aaaaaa aaaaaa aaaaaa Financial crisis in Denmark. J. Rangvid (CBS)
Rating agencies and markets reacted….. 11 Financial crisis in Denmark. J. Rangvid (CBS)
…. and then Danish authorities reacted 12 Fjordbank Mors. June 24, 2011 Bank package IV Absolutely tiny bank. - (the Consolidation Package ) Here’s FT quoting CreditSights: This is a tiny bank by international standards – at end- 2010 Fjordbank Mors had total assets of DKK 13.2 bln Opportunity for the Danish ( € 1.8 bln) and equity of DKK 0.8 bln ( € 0.1 bln) – but there are wider implications for the banking system in Deposit Guarantee Fund to Denmark and Europe. Following the failure of supply funds or provide Amagerbanken , Moody’s downgraded the senior ratings guarantee against losses to a of all Danish banks, including Danske Bank, and this latest move underlines the determination of the Danish buyer bank. authorities to impose losses on senior creditors of failing banks. This is in contrast to the ongoing debate in Ireland, where the ECB has blocked haircuts for senior Since then, solutions founds bondholderrs in Irish banks, but, of course, such action is much easier in respect of such a tiny, domestic and no bail-in required. institution. Nonetheless, it will keep the bail in debate in the headlines and at the forefront of the rating agencies’ thinking. Financial crisis in Denmark. J. Rangvid (CBS)
Learnings 13 Danish crisis due to a combination of being a small open economy, procyclical fiscal policy, optimistic lending practices, liberalization of mortgage lending rules, house price bubble, etc. Extensive bank packages introduced during the crisis. Bank package III – that was the first to implement and use bail-in in Europe – grabbed international attention. It is possible to wind down a (small) bank during a weekend, including imposing losses on senior debt holders, and continue operating the following Monday with no effect for ordinary customers. Denmark first to use bail-in. Costly for Danish banks. Initiatives were taken to soften impact. Financial crisis in Denmark. J. Rangvid (CBS)
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