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Regulation: Watch out for the Danish model

Doubts about access to wholesale funding; Thriving covered bond market

Months after the collapse in February of Amagerbanken, the eighth-largest bank in Denmark, repercussions continue to trouble the country’s banking system. Last month, Moody’s Investors Service concluded a review of six Danish banks initiated in the wake of the takeover of Amagerbanken by a state-sponsored administration authority, downgrading their long-term ratings by one notch and also cutting by one notch the financial strength ratings of five of the banks.

In cutting the financial strength ratings of Jyske Bank, Sydbank, Spar Nord Bank, Ringkjobing, Landbobank and BankNordik, Moody’s paid particular attention to "increased concerns on the viability of market funding in the sector following the application of Bank Package III" as well as to weakened profitability projections in the low-growth Danish economy and continued concerns about the quality of loans to agriculture, real estate and SME borrowers.

Market solutions

Along with those five, Danske Bank, the national champion, had its long-term rating cut to reflect reduced systemic support. "In Moody’s opinion, the use of Bank Package III for Amagerbanken clarified that the Danish government would favour market solutions in future bank bailouts." Market solutions imply that rather than being bailed out by the state, lenders to Danish banks, including senior unsecured bondholders, would have to take a hit in the event of a bank collapsing under the weight of bad loans.

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