Bloomberg
Several of Denmark’s biggest banks will see their so-called bail-in buffers come under intense pressure as the Covid-19 crisis triggers an historic economic slump.
Stress tests published by the Danish central bank show that lenders may need to issue as much as 160 billion kroner ($24 billion) until 2022 to maintain a layer of capital known as MREL, which is designed to absorb losses and ensure taxpayers aren’t called on to bail out the industry.
“Over the coming years, several systemic banks will need to issue new MREL-eligible debt instruments to continue to meet the requirements,†the bank said in its semi-annual analysis of financial stability in Denmark.
The central bank, which was forced to revise its testing due to the pandemic, also said some smaller banks will fall short of capital requirements if the economy sinks into a prolonged recession. Such a downturn is the most severe of the three scenarios envisioned by the bank.
Danske Bank A/S, Denmark’s biggest lender, is among the furthest advanced in the Nordic region in issuing MREL-compliant securities, mostly in the form of so-called senior non-preferred debt.
Norway has gave banks more time to fulfill MREL requirements. Denmark’s central bank said it wouldn’t recommend a similar step.
Karsten Biltoft, head of financial stability at the Copenhagen-based central bank, told reporters it would be “strange†to relax requirements designed to prevent taxpayer bailouts now, as banks face a difficult operating environment. He wouldn’t rule out that some may fall below minimum requirements for equity, triggering intervention by regulators.
Some Danish banks were already at risk of falling short on capital back in November, when the central bank’s severe-case scenario pointed to an economic contraction of 5.2%. Since then, the government has estimated that GDP will shrink 5.3% this year.
Banks face significant losses as many of their customers go out of business. To prevent a credit crunch, Denmark dropped a key capital requirement — the countercyclical buffer — back in March to free up about 200 billion kroner for loans.
The financial regulator has told banks not to use the extra capital for bonuses or dividends. It has also warned the industry not to downplay the risk of losses when estimating impairments.