Danske Bank's acquisition of foreign banks, including its expansion into Ireland, put the stability of the entire Danish economy at risk, a major report commissioned by the Danish government has found.
The report – the first comprehensive inquiry into the causes and effects of the Danish financial crisis – singles out Denmark’s largest bank for criticism, arguing Danske’s foreign purchases contributed to a deposit deficit of 350 billion Danish krone (€47 billion) in 2008 – almost half of the deposit deficit of the entire banking sector. In particular, it is criticised for its investments in the Republic and Northern Ireland which cost the bank DKK30 billion (€4 billion) during the period of 2008-2012.
Responding to the report yesterday, Danske chief financial officer Henrik Ramlau-Hansen said “the acquisition of the Irish banks was something we would do differently if we had known then what we know now.”
Danske entered the Irish market in 2005, acquiring National Irish Bank in the Republic and Northern Bank in Northern Ireland. The €1.4 billion acquisition represented the bank's first significant move outside the Scandinavian market, with Danske having previously bought banks in Norway and Sweden.
While Danske met its solvency requirements, "there is still no doubt that the bank put itself in a vulnerable position that, given the bank's size, would have shaken financial stability in Denmark if the risks had materialised," the report found.
Tight regulations
The report, compiled by finance professor Jesper Rangvid, was commissioned by the Danish government in December 2012. Among its recommendations is a warning against the easing of the tight regulatory regime introduced in the wake of the financial crisis. It also questions the sufficiency of a leverage limit of 3 per cent for banks, noting that the US and the Netherlands have imposed higher limits..
Like most countries in Europe, Denmark’s financial sector was hit by a liquidity crisis and property collapse during the global financial crisis of 2008, although its unique mortgage system, rooted in a strong regulatory framework, shielded it from the worst.
Nonetheless, the Danish regulatory authority took a tough stance against lenders, implementing one of the first "bail-ins" of senior creditors during the wind-down of Amagerbanken A/S in 2011. A total of 62 banks ceased operating between 2008 and August 2013, according to the Rangvid report, after failing to meet tough solvency requirements.
Danish rescue
Danske, which holds about 30 per cent of the Danish market, received a government rescue package in 2009, subsequently shutting two-thirds of its bank branches. The bank recently courted controversy when it used imagery of Occupy Wall Street protesters in its advertising campaigns.
On Monday, the bank's chief executive, Eivind Kolding, was ousted after less than two years in the job, with the bank declaring it needed a chief executive "with stronger qualifications within banking".
Speaking last month, Mr Kolding indicated the bank’s strategy in Ireland was to run down its non-core portfolio. The bank has booked millions of euro of impairment losses on its Irish portfolio and closed its 27 branches in the Republic, though it still has a significant online presence. It expects to clock up €750 million in impairments by the end of 2014.
Its most recently published results show its Irish division reported a pretax loss of €17.4 million during the second quarter of this year, up from an €8.8 million loss in the first quarter. Loan impairment charges also jumped – to €15.4 million in the second quarter, compared with €5.5 million at the end of March. It had a loanbook of €2.9 billion, with customer deposits of €3.4 billion, the bank reported.
