Denmark Bolsters Defenses Against Wider Danske Bank Risks

September 25, 2018 Updated: September 25, 2018

COPENHAGEN—Denmark has bolstered defenses against shocks to its financial system after a risk-assessment body said the sector’s stability could be threatened by the Danske Bank money-laundering scandal.

Danske Bank’s CEO resigned last week after an inquiry revealed that 200 billion euros ($235 billion) of payments had been moved through its Estonian branch over a period of eight years, with many of the transactions said by the bank to be suspicious.

The Systemic Risk Council, which monitors threats to the stability of Denmark’s financial system, said on Sept. 25 that the case is a risk for the country’s entire financial sector. It advised the government to double the cash cushion that financial firms must hold to protect against economic shocks, to 1 percent of risk-weighted exposure, partly because of the Danske Bank case and partly because of increasing risks in banks’ overall lending.

“The Danish financial system is highly affected by developments and risk perception in international markets. That is why the Danske Bank money laundering case poses a risk to the entire sector and to Denmark’s international reputation,” the council said.

The warning was heeded by the government, which raised the buffer to 1 percent with effect from Sept. 30, 2019, giving the banks a year to meet a requirement that the Systemic Risk Council says adds 7 billion crowns ($1.1 billion) to their existing regulatory equity requirements.

The “vast majority” of banks will be able to comply with the new requirement, given the sector’s excess capital adequacy was 129 billion crowns in mid-2018, the council said.

Business minister Rasmus Jarlov, meanwhile, said that Denmark’s Financial Services Authority (FSA) could have been more critical in its examination of Danske Bank.

“I don’t understand that the authorities in Denmark and in Estonia haven’t reacted stronger to the many warnings that there have been,” Jarlov told an open parliament committee meeting on Sept. 25.

He said that the FSA’s reopened investigation of the case would look at whether the bank could be held responsible for having given wrong information to the regulator, and that he is ready to assign the resources necessary to get to the bottom of the case.

Parliamentary Hearing

The bank’s management was invited by parliament’s business committee to explain its actions to an open hearing.

Under Danish law, no one is obliged to participate in public hearings or comment under oath at them. The bank has yet to decide whether it will participate, a spokesman said.

The money-laundering scandal has also hit Danske Bank’s credibility among Danes, figures from polling firm Voxmeter showed on Sept. 25. The percentage of Danes who find the bank credible fell to 46 percent, by far the lowest level since recordings began in 2008, Voxmeter said.

The figures suggest that the bank’s image crisis is worse than after the 2008 financial crisis, when the Danish government had to give a guarantee to the bank’s dollar creditors when international loan markets froze.

“This new case is being seen as a breach of trust by customers, and trust is a strong driver for a bank’s business,” said Voxmeter CEO Christian Stjer.

By Teis Jensen and Jacob Gronholt-Pedersen