One country gets it on bank reforms
BELIEVE IT or not but Denmark has emerged as Europe’s pioneering financial reformer. We need to learn from it. Fjordbank Mors, a small lender, has just been allowed to go bust; taxpayers are not having to shell out a penny and the world hasn’t come to an end. Senior bondholders at Fjordbank Mors are taking a massive hit, shareholders are losing everything, the management is being sacked, depositors with more than the maximum guaranteed by the deposit insurance scheme are losing out (tough, but necessary) and the taxpayer is being protected.
This is the second time this happens under Denmark’s new resolution procedures designed to allow an orderly, controlled failure of banks and thus reintroduce profit and loss discipline into the industry; I have been calling for these kinds of measures to be used universally in this column for several years now. It is good to see the Danes see sense. Four months ago, Denmark seized Amagerbanken, another bust lender. That time, senior bondholders suffered a 41 per cent haircut, making them the first anywhere in the EU to suffer a loss.
Something similar is likely this time. The government’s wind-up vehicle Finansiel Stabilitet has seized the bank’s assets, paying Dkr7.8bn, and providing liquidity to a new company tasked with serving Fjordbank Mors’ customers. The price paid implies a 26 per cent loss for creditors, including 450 individuals with deposits exceeding €100,000. The industry pays into a fund to raise liquidity for collapses of this kind, protecting taxpayers.
Until now, bank bondholders across the EU have been protected by governments, a ridiculous state of affairs. Bank-debt was made risk-free, allowing shareholders to borrow cheaply and hence to enjoy an implicit subsidy. It also meant that providers of credit didn’t care enough about banks’ risk-taking. Slowly but surely, this is changing. George Osborne has warned that only the first £85,000 deposited in a UK bank will be protected – anything above that will be lost. He seems to mean what he says: earlier this month, he allowed a small Portsmouth-based bank to go bust. Southsea Mortgage and Investment went under, leaving 250 savers asking for their money back from the guarantee scheme. Crucially, 14 unlucky customers who held more than the limit were the first in years to lose some of their savings after Osborne pledged to take a tougher stance in his Mansion House speech. It’s a tough but necessary measure to force customers to become vigilant and to only trust safe banks with their money.
Some in Danish bankers are complaining that their cost of finance has shot up as credit rating agencies now assume a larger risk premium. But that is no bad thing. Everybody needs to face an accurate cost of capital. It should be neither artificially high nor artificially low. The removal of government guarantees is a good thing. It will lead to a better allocation of resources, a more rationally managed financial sector and correctly priced credit, reducing the risk of bubbles. Most important of all, it will allow the City to regain the moral high ground, which it lost when it was bailed out. The real problem in finance has been too little capitalism, not too much. Reforms need to be put into place to ensure that even large banks can be weaned from state guarantees and subsidies. It will be great news for the City’s long-term prospects if the Danish experiment succeeds.
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