Bond investors have demanded a premium from Danish banks since the Nordic country in 2011 became the first in Europe to enforce a resolution framework that pushed losses onto senior creditors. At Danske Bank, the largest lender in Denmark, Eivind Kolding
told investors in November that becoming a Sifi will help support the bank's rating.
A proposed European bank resolution and recovery directive, adopted by the European Commission in June, has yet to be agreed on. European Bank's Benoit Coeure said the region needs to move forward "as soon as possible" on deciding the issue. Denmark's resolution agency has taken over a dozen banks since the country's housing bubble burst in 2008, with senior creditors in regional lenders Amagerbanken and Fjordbank Mors suffering losses.
A lawmaker-appointed panel is due to present its recommendations on Denmark's Sifis this month. The proposals will include a list of which banks should be deemed too big to fail and how much extra capital they must hold. It will also address the need for living wills that would work as roadmaps for orderly resolution.
Stress tests conducted by the European
Banking Authority and the central bank to date have singled out Danske, Nykredit, Jyske Bank and Sydbank as having systemic importance to Denmark's financial health. "All Danish financial institutions that might be affected by the Sifi rules are on the right side, and by quite a margin, of what we expect them to deliver in extra capital buffers," Engelbrecht said. "So I don't see it as a challenge for them."
"The intention is that taxpayers never have to put money toward a bank bailout," Engelbrecht said. "The model here in Denmark is that the banks provide the funds that might be needed to support the sector, corresponding to one per cent of the industry's insured net deposits.""It's of principle importance to this government to protect taxpayers."
Should the amount needed to support banks exceed the reserves set aside by the industry, then any state funds used to make up the difference would be reclaimed by requiring banks to pay until taxpayers are reimbursed and the one per cent buffer of insured net deposits is restored, Engelbrecht said.
Danish banks already face new requirements to hold as much as 18 per cent, including capital conservation and countercyclical buffers, according to the Financial Supervisory Authority. Additional capital demands facing Sifis could bring that ratio as high as 21 per cent of risk-weighted assets. "There will be additional capital requirements that ensure these banks have enough reserves to support their too-big-to-fail status," Engelbrecht said.