Six Danes SIFIs under Committee criteria, plus DLR

A committee of the Danish Ministry of Business & Growth has recommended a quantitative approach to identifying systemically important financial institutions (SIFIs) under which six of Denmark’s financial groups would be designated SIFIs, with DLR Kredit additionally qualifying for qualitative reasons.

The SIFI Committee made its recommendations on Thursday of last week (14 March) in a delayed report back to the ministry and a public consultation based on it closes on 19 April, with political negotiations likely to start during the spring, according to the ministry.

Under the quantitative criteria established by the committee, Danske Bank (including Realkredit Danmark), Nordea Bank Danmark, Jyske Bank, Sydbank, and the bank and mortgage credit institutions of Nykredit and BRFkredit would be designated SIFIs.

The criteria are based on the institutions’ amount of loans relative to total loans, deposits relative to total deposits, and its assets relative to GDP, with the threshold for the GDP indicator being 10%, and the others 5%. Institutions qualify as SIFIs if they exceed one or more of the thresholds.

DLR Kredit was additionally recommended as a SIFI based on its large share of lending to the agricultural sector, which the committee said would be difficult for other institutions to substitute “in light of the current state of the sector”.

The committee recommended introducing a special approach for crisis management of SIFIs, including alternatives to Bank Package III and the existing wind-up scheme for mortgage credit institutions, which it said are insufficient for managing distressed SIFIs.

“These tools include, for example, recovery and management plans, the sale of one or more capital centres and the establishment of a SIFI stability fund,” said Danske analysts, also noting that the committee also found it important to view the mortgage credit sector as a whole.

The committee recommended that additional SIFI capital requirements should be set at between 1% and 3.5% RWA, or higher, and that this is phased in until 2019. SIFIs should also hold a crisis management buffer of 5% of RWA consisting of debt that can be converted or written down.

SIFIs should meet LCR requirements in full by 2015, recommended the committee, ahead of CRD IV, with requirements for stable funding set from 2014 to ensure that the dependence of SIFIs on very short term funding is reduced.

“We see this as another signal to the mortgage banks to reduce their share of one year ARMs, which appears to be already happening,” said Danske analysts.