Denmark’s central bank said it will provide as much as 400 billion kroner ($72.6 billion) as part of an extended collateral program to provide emergency liquidity to the country’s banks.
Lenders will also be able to borrow liquidity for six months, alongside the central bank’s existing seven-day facility, at a rate that tracks the benchmark lending rate, currently 1.55 per cent, the bank said in a statement on Friday.
The country’s lenders face a deepening crisis that threatens to stall a recovery in Scandinavia’s worst-performing economy. Two Danish bank failures this year triggered senior creditor losses, leaving international funding markets closed to all but the largest banks. Lawmaker efforts to spur a wave of consolidation and help banks sidestep Denmark’s bail-in rules have so far failed.
“The expanded program is designed to supplement financial institutions’ access to taking loans and thereby build a bridge to a situation without state guarantees, when these expire in 2012 and 2013,” central bank Governor Nils Bernstein said in the statement.
Danish financial stocks initially rose as much as 0.5 per cent, before trading down 0.6 per cent higher, outperforming the 46-member Bloomberg index of European banks, which was down 1.9 per cent as of 10.54 am in Copenhagen. Danske Bank A/S, Denmark’s biggest lender, gained as much as 1.6 per cent, before trading 0.4 per cent lower at 80.25 kroner.
ECB LIQUIDITY
Denmark’s liquidity lifeline mirrors programs in the euro area, where the European Central Bank (ECB) has been pumping cash into the region’s money markets, including dollar liquidity, to support lenders.
The Danish central bank’s program is “broadly consistent with what the ECB has been doing,” Nick Anderson, a London-based senior analyst at Berenberg Bank, said. “This was all about smaller banks. It’s clearly helpful.”
The central bank is boosting its liquidity support to help lenders stay afloat as they struggle to refinance 158 billion kroner in debt backed by a state guarantee that expires over the next two years.
Still, the head of the country’s bank resolution unit, the Financial Stability Company, said the emergency liquidity facility may not be enough to prevent further insolvencies.
NOT ENOUGH
The program “will probably not solve all problems,” Henrik Bjerre-Nielsen, director at the Financial Stability Company said in an interview before the plan was announced on Friday. “The kind of financing you can get by borrowing against your high quality loans at the central bank is not medium-term financing. And medium-term financing is crucial for having a proper financing strategy.”
About 75 of Denmark’s 90 local banks probably need to disappear, Financial Stability Company Chairman Henning Kruse Petersen said in an interview this month. Mergers are being stalled by scepticism amongst Denmark’s healthier banks about what may be lurking on the balance sheets of their troubled peers, according to Ulrik Noedgaard, the director general at the Financial Supervisory Authority.
Jyske Bank A/S, Denmark’s second-biggest listed bank, on Friday said it bought parts of Fjordbank Mors A/S, which failed in June after losing money on loans to real estate and farming.
BANK MERGERS
The healthy parts of Amagerbanken A/S, which failed in February, were bought by Faroese lender BankNordik P/F in May. The Torshavn, Faroe Islands-based bank was downgraded this month by Moody’s Investors Service, which said the purchase added risk.
Banks are cutting lending and dumping assets as they struggle to refinance loans coming due. Lenders with the biggest refinancing burdens are unlikely to benefit from the central bank’s liquidity line, Bjerre-Nielsen said.
FIH Erhvervsbank A/S, the largest holder of state-guaranteed bonds, according to Financial Stability, probably will tap the liquidity lifeline, Chief Executive Officer Bjarne Graven Larsen said in an interview before the program was announced. The bank holds about 45 billion kroner in state-backed bonds, after repaying about 5 billion kroner this week.
The facility may not be enough for some banks, particularly if it expires in 2013, Graven Larsen said. The central bank on Friday didn’t specify how long the program will run. In August, the bank said the facility will last “until further notice.”
SUSTAINABLE FUNDING
Banks will be allowed to include central bank cash from the program in their liquid assets to meet liquidity requirements, the FSA said in a statement on Friday.
“For banks that are very dependent on the central bank’s lending facility, we will place emphasis on their efforts to achieve sustainable funding,” the FSA said on its website.
The new facility will be opened monthly, with the first offering on Oct. 28, the bank said. Banks will be able to pledge as collateral the remaining balance of loans as well as 90 percent of agreed overdrafts less any set-off and a 3 percent haircut on loans and overdrafts denominated in euros, the bank said. The collateral value is then calculated as the amount arrived at by using this calculation, minus a 25 percent haircut and a margin of 10 percent.
Banks using the facility need to pledge so-called top-up collateral if the value of the loan portfolio falls by more than 5 percent. Banks can’t use credit given to other financial institutions as loans for this facility, the central bank said.
