As Europe Relaxes Bank Rules, a Nordic Watchdog Sounds the Alarm
As Europe Relaxes Bank Rules, a Nordic Watchdog Sounds the Alarm
(Bloomberg) -- The financial watchdog in Denmark says it’s a bad idea to ease impairment rules to help banks cope with the economic crisis triggered by Covid-19.
“It’s a little bit like when people are sick: you don’t want to manipulate the thermometer,” Jesper Berg, the director general of the Financial Supervisory Authority in Copenhagen, said in an interview. “If you do that, you risk not taking the actions you need to take, both as a bank but also as a supervisor.”
The European Union has responded to the threat of a credit crunch by scaling back a number of requirements that affect everything from how banks book impairments to how indebted they’re allowed to be. The idea is to ensure that lenders keep providing cash to businesses hit by lockdowns.
But Berg says history suggests that relaxing bank regulations has a tendency to feed financial risk further down the road. He also warns that investors will end up treating what banks report with skepticism.
“At the end of the day, if the markets think that you are distorting the statements, they will add in risk premiums,” Berg said. And laxer rules are no guarantee that loans will continue flowing; banks may “refrain from lending anyway, or take very big risks in the spirit of when in trouble, double,” he said.
Denmark has had its fair share of financial crises. Following the 2008 meltdown, scores of lenders failed after their businesses grew bloated on risk. In 2011, Denmark became the fist EU nation to impose losses on senior bank creditors as part of a new bail-in law.
Like other countries, Denmark has removed the so-called countercyclical buffer, on the condition that banks don’t use the extra money to enrich shareholders or themselves. The government has since chided the country’s biggest lender, Danske Bank A/S, for committing to bonuses.
Even if the current crisis persists, Berg says he wouldn’t consider easing impairment requirements for banks. Instead, they’ll be ordered to raise equity so they can maintain lending, he said.
Danske’s impairments in the first quarter are expected to have more than doubled to 2.9 billion kroner ($428 million), according to an average estimate compiled by the bank. It’s due to report results on Thursday. Jyske Bank A/S, Denmark’s second-biggest listed lender, already revealed a surge in impairments from Covid 19 to 1 billion kroner; before this year, Jyske averaged annual impairments of 22 million kroner.
Read More Here: European Banks Kick the Can Down the Road on Virus Credit Losses
Denmark doesn’t require banks to automatically book impairments for customers that have broken loan covenants or to whom they’ve extended more credit, he said.
Instead, bankers have to decide whether “this is fundamentally a sound credit or not” based on “economic scenarios not just for the coming year but also for the years to come, depending on the length of the credit,” Berg said.
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