The Roskilde Bank problem
Over the weekend the Danish Central Bank took over bankrupt Roskilde Bank, wiping out shareholders. Tiny Denmark has had a bankruptcy on its hands that is following the script of Northern Rock in the UK to a tee:
- After lending too much money to the wrong people, the government is forced to step in as no private lenders want to have anything to do with the situation. A few months later the losses have mounted.
Will the losses stop at Roskilde or Northern Rock? Probably not. The scenario portends ill for the European and American banking sector and the FT has a good read on why (I’ll have more to say on Denmark when I have more time — notice my highlighting in bold below).
“It is clear that most people don’t believe the financial crisis is over.” With those words the Federal Reserve’s annual confab in Jackson Hole came to a close, and another bank went under. What is noteworthy about the collapse of Denmark’s Roskilde Bank is that it did not fail because of subprime losses (it had almost none) or lack of liquidity (the bank had unlimited access to central bank funds), but due to dud real estate loans kept on its books. As this may be the next shoe to drop in the credit crunch, small Denmark is showing the way for the world.The country has a proven record as a path-breaker. In 1992, Denmark’s “No” vote to the Maastricht referendum helped throw Europe’s exchange rate mechanism into chaos. Now it has some of the world’s most over-valued homes: since 2004, house price inflation has exceeded even that in the US, UK or Spain. Its consumers are also among the most indebted, with household debt at three times disposable income. This borrowing splurge was fuelled by inappropriately low interest rates imported via the Danish currency’s peg to the euro. Now that the splurge has ended, property prices are crashing. Indeed, Denmark was the first European economy to enter recession.
Refreshingly, bank rescues the Viking way seem to mean no bailouts for shareholders. Having failed to find a private buyer, Denmark’s central bank will inject almost $1bn to keep Roskilde afloat, appoint new managers, and assume its debts and loan book. At some DKr40bn ($8bn) this is a fraction of the $30bn of Bear Stearns assets the Fed took onto its books, or the £20bn of Northern Rock mortgages assumed in the UK. But, given the size of the Danish economy, the bailout could also be proportionately higher. All this from a regional lender with only 26 branches, fewer than 100,000 customers, and top marks from ratings agencies only a year ago. We have been warned
This failure has a lot more significance than people might think. The Roskilde bankruptcy is the canary in the mineshaft for U.S. regionals with construction loan and commercial real estate exposure and for small Spanish banks about to lose their shirts over Spanish vacation home overbuilding.
In Denmark, this bankruptcy has been big news. It should be elsewhere for what it portends for the future. Expect more on this later.
For more posts on Denmark and Roskilde, see the label Denmark.
UPDATE: Other articles
Is Denmark’s Roskilde Bailout a Harbinger of Deals to Come? – DealBook
Danish central bank takes over ailing lender – IHT
Danish banking supervisors are just as guilty as the FSA in the UK.
N Rock’s gross lending doubled in 3 years (2004 to 2007) and FSA did not bat an eyelid. Per today’s FT, Roskilde’s lending went up by 37% in a single year.
You are 100% spot on. The regulators were sleep at the wheel all over Europe and North America. At least the UK controls fiscal AND monetary policy so it can coordinate a response. Europe can’t say the same.
Personally, I look at Roskilde as big news, a veritable canary in the mine shaft event. Especially after the Dutch National Bank head Wellink said thew ECB was going to cut off the liquidity tap, I expect some Spanish banks to fail.
Will there be more bailouts. Yes. Will the taxpayer be on the hook like with N. Rock. Yes. Could this have been prevented by tighter regulation. Somewhat, yes.