Europe’s Bail-In Regime Draws Criticism From Denmark

(Bloomberg) --

The first European Union country to bail in senior bank creditors says measures adopted by the bloc to avert another financial crisis are on the wrong track.

Jesper Berg, director general of Denmark’s Financial Supervisory Authority, and Henrik Bjerre-Nielsen, head of the country’s bank resolution agency, argue in a new paper that while it’s an “impressive piece of legislation,” the Bank Recovery and Resolution Directive can’t be implemented in its current form. They also say that a revision under way is a step “in the wrong direction.”

A main goal of BRRD is to prevent taxpayers from having again to rescue failing lenders, by shifting the burden of losses to investors. Denmark was at the forefront of such an approach after adopting new legislation in 2010.

But Berg and Bjerre-Nielsen write in a paper for the European Money and Finance Forum, a non-profit association, that it’s become “obvious” that BRRD’s “implementation at this moment, including bail-in of senior creditors, not to mention un-guaranteed depositors, in many countries is neither politically nor economically feasible.”

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The critique follows a string of recent bail-outs by governments. In December, the European Commission approved the rescue of NordLB, a German savings bank, by the governments of Lower Saxony and Saxony-Anhalt. The same month, Italy set aside 900 million euros ($990 million) to recapitalize Banca del Mezzogiorno-Mediocredito Centrale, a state-owned bank, to save a private regional lender, Banca Popolare di Bari SCpa.

According to Berg and Bjerre-Nielsen, what’s needed is a reckoning with reality.

“We suggest that the differences in the situation of individual countries and banks today is recognized, and each country develop individual plans for every bank in their country in order to maximize the likelihood that the EU will be prepared, when the next crisis comes along,” the regulators said.

Such an approach will also pave the way better for eventual harmonization of policies “as opposed to a process where standards are imposed without such consideration,” Berg and Bjerre-Nielsen said.

To contact the reporter on this story: Frances Schwartzkopff in Copenhagen at fschwartzko1@bloomberg.net

To contact the editor responsible for this story: Tasneem Hanfi Brögger at tbrogger@bloomberg.net

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