Europe: Top Marks for Denmark
In an editorial by Allister Heath in City AM wrote in a recent editorial, that, perhaps somewhat surprisingly (or extremely actually damn right shocking), it seems that today, Denmark has become “Europe’s pioneering financial reformer.” This, Heath believes, comes with an important financial message for those who want to become more in-the-know otherwise there could be real trouble as is already happening a bit. First, small lender Fjordbank Mors has gone bust and its senior bondholders are being hit bad with shareholders losing everything left and right and management out on their ears. It seems like none of this is impacting the taxpayer though; good news for them, bad for the money lenders.
New Denmark Laws
So why is this happening? Well, first it’s important to note that it’s not the first occurrence; according to Heath, its’ the second time following the country’s “new resolution procedures designed to allow an orderly, controlled failure of banks and thus reintroduce profit and loss discipline into the industry.” Heath has been arguing for this to happen globally for years. What’s new now is that bank bondholders across Europe are no longer getting government protection (finally, since that was kind of crazy). It became very easy to get a bank debt since there were no risks involved which ultimately enabled “shareholders to borrow cheaply and hence to enjoy an implicit subsidy.” In addition, it was found that credit providers could care less about banks’ risk taking. But it looks like this situation is finally changing. Now, only there will only be protection for the first £85,000 that’s deposited in a UK bank; more than that will be lost.
Dissenting Danish Bankers
It’s not so great for Danish bankers though who are now whining about the fact that their financial expenses have substantially increased simultaneous to credit rating agencies “assuming a larger risk premium.” But okay, it’s not the end of the world; it’s time this issue was faced in a realistic way without relying on government guarantees. Heath believes that this should ultimately result in a “better allocation of resources, a more rationally managed financial sector and correctly priced credit, reducing the risk of bubbles.” There has probably been “too little capitalism, not too much” and thus there is a need for reforms to be made to make sure that even the bigger banks “can be weaned from state guarantees and subsidies.” As Heath concludes, should this happen, it “will be great news for the City’s long-term prospects if the Danish experiment succeeds.”