Danske Scandal Has Danish Central Bank Citing Systemic Risks

(Bloomberg) -- Danske Bank A/S’s dirty money scandal could hurt the whole finance industry in its home market amid risks that investors and customers lose confidence in the sector, Denmark’s central bank warned.

“Money laundering problems in a single bank could spread to the entire financial sector and could in turn affect financial stability,” Copenhagen-based Nationalbanken said on Friday.

Danske is at the center of a $230 billion case that has turned into one of Europe’s worst ever money laundering scandals. Its shares have plunged about 45 percent this year and the central bank noted on Friday that funding costs for Danske have also risen, with senior debt yields trading about 40 basis points higher than the average among peers.

The scandal has already triggered a criminal investigated by the U.S. Justice Department and Danske has been ordered by the Danish financial regulator to hold an extra $1.5 billion in capital to create a buffer against potential fines. With a balance sheet that’s about 1 1/2 times the size of the economy, Danske is by far Denmark’s most systemically important lender.

The laundering scandal has dominated international headlines about Denmark. Karsten Biltoft, the head of the central bank’s financial stability division, says it’s “one of the first things you get asked about when traveling abroad.”

Biltoft says that the worry for the central bank is that “distrust” triggered by the Danske scandal will “threaten financial stability” in Denmark.

Excessive Risk

The central bank also urged Danish lenders to refrain from adding risk in an effort to make up for low lending growth. And it’s asking the industry to keep increasing capital buffers instead of paying out more in dividends.

Denmark’s record-low interest rates and benign financial conditions have formed the basis for lenders to offer loans with greater risks, it said.

“It’s important that the banks maintain high credit standards to ensure that they do not advance in new markets on the basis of excessive risk-taking,” Governor Lars Rohde said in the statement.

Stress tests conducted by the central bank showed that Denmark’s systemically important lenders have a “comfortable” buffer to their minimum capital requirements, it also said on Friday.

“But a few are close to exceeding the add-on buffer requirements,” the central bank warned. “If the banks were to build up equity capital instead of distributing dividends to their owners in the first year of the stress test, none of the systemic banks would be close to exceeding the buffer requirements.”

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