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Denmark rescues bank to secure financial stability
By David Ibison in Stockholm
Published: August 26 2008 03:00 | Last updated: August 26 2008 03:00
Denmark's central bank has taken control of the country's eighth-largest retail lender to avert a systemic financial crisis - the first such move for 15 years.
Nationalbanken and about 100 Danish financial companies are injecting DKr4.5bn ($890m, €603m, £480m) cash into Roskilde Bank and assuming DKr37.3bn of debt after its portfolio of property-related loans went bad.
"We wanted to secure financial stability in Denmark. The alternative would have been that Roskilde went bankrupt and that would have resulted in a considerable contagion throughout the financial sector," said Nils Bernstein, governor of the central bank in Copenhagen.
Roskilde, which has 24 branches and about 100,000 customers, is the second small Danish bank to face a liquidity crunch. Earlier this year Trelleborg was forced to sell itself to Sydbank.
The latest rescue brings the effects of the global economic crisis to Denmark's doorstep and highlights the country's growing economic difficulties. In the first quarter of this year it became the first European Union member to go into recession.
Rising interest rates and sharp increases in food and oil prices have undermined household incomes in Denmark, weakening consumer demand and triggering a correction in property prices.
Roskilde was put up for sale in July after revealing losses stemming from exposure to the weakening Danish property market. But a buyer was not found and the central bank was forced to step in.
Roskilde said an uncompleted audit had unveiled an additional DKr1bn in writedowns on loan provisions on top of the DKr520m to DKr540m it forecast in July.
Mr Bernstein, who des-cribed Roskilde's culture as "slipshod", said the decision to mount a rescue was taken because he believed other Danish banks might have experienced difficulties raising funds from international capital markets in the event of Roskilde's collapse. He sought to limit the potential systemic impact of the bail- out, saying other Danish banks were not as exposed to the property market as Roskilde and that "in general, Danish banks are well prepared" to deal with a weakening economy.
Despite the central bank's reassuring words, market sentiment towards other financial companies, such as Amagerbanken and Forstaedernes Bank, weakened yesterday, pushing their share prices sharply lower.
However, shares in the country's largest banks - Danske Bank, Jyske Bank and Sydbank - declined only slightly, indicating the pillars of the country's banking industry remain sound.
Roskilde's investors will be wiped out. "Unfortunately for shareholders and holders of hybrid core capital and subordinated loan capital, as things look today they have most likely lost their capital," said Mr Bernstein.
The Danish economy shrank by 0.2 per cent in the fourth quarter of last year and by 0.6 per cent in the first quarter of this year, putting the country into a technical recession.
But analysts pointed out that Danes have not been living beyond their means and that the coming downswing in consumer spending should not be too severe.
This view is backed up by the fact that wages are growing faster than headline inflation, which means real incomes are rising, and unemployment is falling, although it is expected to start rising later this year as growth slows.
Lex, Page 16 www.ft.com/creditsqueeze
Copyright The Financial Times Limited 2008
Denmark rescues bank to secure financial stability
By David Ibison in Stockholm
Published: August 26 2008 03:00 | Last updated: August 26 2008 03:00
Denmark's central bank has taken control of the country's eighth-largest retail lender to avert a systemic financial crisis - the first such move for 15 years.
Nationalbanken and about 100 Danish financial companies are injecting DKr4.5bn ($890m, €603m, £480m) cash into Roskilde Bank and assuming DKr37.3bn of debt after its portfolio of property-related loans went bad.
"We wanted to secure financial stability in Denmark. The alternative would have been that Roskilde went bankrupt and that would have resulted in a considerable contagion throughout the financial sector," said Nils Bernstein, governor of the central bank in Copenhagen.
Roskilde, which has 24 branches and about 100,000 customers, is the second small Danish bank to face a liquidity crunch. Earlier this year Trelleborg was forced to sell itself to Sydbank.
The latest rescue brings the effects of the global economic crisis to Denmark's doorstep and highlights the country's growing economic difficulties. In the first quarter of this year it became the first European Union member to go into recession.
Rising interest rates and sharp increases in food and oil prices have undermined household incomes in Denmark, weakening consumer demand and triggering a correction in property prices.
Roskilde was put up for sale in July after revealing losses stemming from exposure to the weakening Danish property market. But a buyer was not found and the central bank was forced to step in.
Roskilde said an uncompleted audit had unveiled an additional DKr1bn in writedowns on loan provisions on top of the DKr520m to DKr540m it forecast in July.
Mr Bernstein, who des-cribed Roskilde's culture as "slipshod", said the decision to mount a rescue was taken because he believed other Danish banks might have experienced difficulties raising funds from international capital markets in the event of Roskilde's collapse. He sought to limit the potential systemic impact of the bail- out, saying other Danish banks were not as exposed to the property market as Roskilde and that "in general, Danish banks are well prepared" to deal with a weakening economy.
Despite the central bank's reassuring words, market sentiment towards other financial companies, such as Amagerbanken and Forstaedernes Bank, weakened yesterday, pushing their share prices sharply lower.
However, shares in the country's largest banks - Danske Bank, Jyske Bank and Sydbank - declined only slightly, indicating the pillars of the country's banking industry remain sound.
Roskilde's investors will be wiped out. "Unfortunately for shareholders and holders of hybrid core capital and subordinated loan capital, as things look today they have most likely lost their capital," said Mr Bernstein.
The Danish economy shrank by 0.2 per cent in the fourth quarter of last year and by 0.6 per cent in the first quarter of this year, putting the country into a technical recession.
But analysts pointed out that Danes have not been living beyond their means and that the coming downswing in consumer spending should not be too severe.
This view is backed up by the fact that wages are growing faster than headline inflation, which means real incomes are rising, and unemployment is falling, although it is expected to start rising later this year as growth slows.
Lex, Page 16 www.ft.com/creditsqueeze
Copyright The Financial Times Limited 2008
