Is Danske Bank too big for its britches?

If Danske Bank fails, it could take the whole country with it, financial experts warn

DenmarkÂ’s largest bank needs to slim down if itÂ’s going to fit into the countryÂ’s economy.

ThatÂ’s what financial experts told trade union magazine A4 last week, which reported that Danske Bank has grown too big for a country as small as Denmark.

“With the size that it enjoys today, it is only fair to describe Danske Bank as a financial weapon of mass destruction, because the bank can pull the entire Danish society down with it,” said Jacob Funk Kirkegaard, an economist and research fellow at the Peterson Institute for International Economics.

Danske Bank has grown at a rapid pace over the past ten years. In 2001 it had a total net worth that was equal to 115 percent of Denmark’s GDP. By 2011, its assets had grown to 3,381 billion kroner – nearly twice the value of the GDP.

Among the existing worries about Danske Bank is that it played a lead role in exacerbating the recession in Denmark, thanks to loose lending policies that inflated the housing bubble. It has also been criticised for a risky foreign expansion strategy that saw it acquire National Irish Bank in 2005 and FinlandÂ’s Sampo Bank in 2006. In 2010, foreign bank activities accounted for 36 percent of the bankÂ’s overall exposure.

Caspar Rose, a professor at the Institute for International Economics at Copenhagen Business School, agreed that Danske BankÂ’s size is a problem, especially given its lack of competition in the banking market.

“Danske Bank currently has a commercial advantage by being what one would describe as too big to go down,” he said.  “It can do business knowing that the state will come to the rescue if it goes down. This leads to market distortion and could provide the bank an incentive to grow even bigger.”

For this reason, the government has begun to consider regulation to control big banks like Danske Bank, which may soon be deemed “systematically important banks”. In January, a government-appointed committee was formed to submit recommendations for large bank regulation in order to further comply with the internationally agreed financial regulation rules of the Basel Accords.

Several European countries have exceeded the Basel Accords by putting capital requirements on banks, thus controlling how big they become. Rose told A4 that Denmark should follow suit.

“[Denmark] should give a clear incentive for Danske Bank to slim down while widening the field for healthier-sized smaller banks. But that being said, it is also important that the government be clear that it regards Danske Bank to be systematically important to the country so that the bank’s funding costs are reduced,” he said.

Danske Bank CFO Henrik Ramlau-Hansen told The Copenhagen Post that a bank’s size isn’t what’s decisive. What’s most important, he said, is that “Danske Bank is one of Europe’s best capitalised banks, has a solid funding, and a well-founded business platform.”

Ramlau-Hansen also noted that it is important that Danske Bank caters to large international customers, which will give it equal footing with competing banks. Still, he noted that he agreed with the need for tighter regulation.

“We are prepared to enter into a dialogue with authorities on how future capital requirements for how future capital for systematically important banks should look,” he said.

Lawmakers A4 spoke with had several suggestions for how to tame Danske Bank. Liberal Alliance spokesperson Ole Birk Olesen said that it is sensible to split the bank up by the countries it operates in. WhatÂ’s important, he noted, is to develop a plan to make the banks survive without government help in situations like Danske BankÂ’s past activities in Ireland and Finland.

Taking it a step further, Enhedslisten spokesperson Frank Aaen said Danske Bank should be entirely split into a division for commercial banking and one for market speculators.

Still, Venstre spokesperson Kim Andersen said his party is most interested in financial stability.

“There will certainly be increased capital requirements and certain institutions need better padding or slimming of balance,” he told A4. “But we also have an interest in ensuring that reasonable projects can receive loan financing, because we must also think about growth and jobs.”