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Danish bank raises spectre of senior haircuts

YVES HERMAN/Yves Herman/Reuters

Tracy Alloway is deputy editor, FT Alphaville at Financial Times

A small Danish bank is generating a large amount of interest among investors.

Amagerbanken announced on Sunday that it would transfer assets to Denmark's Finansiel Stabilitet, the state-owned company charged with winding down the country's insolvent banks, after failing to meet solvency requirements. Finansiel Stabilitet was created in October, 2008, as part of a wide-ranging bank rescue package and has already taken over a number of bankrupt Danish financials.

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The failure of Amagerbanken is being watched closely: it may become a rare instance of depositors and investors in a bank's senior debt experiencing losses.

Amagerbanken will be the first Danish bank to be bailed out after the expiration of Denmark's government guarantee on unlimited bank deposits and unsecured senior debt. That could leave Amagerbanken bondholders and depositors exposed to losses, an event that has been infrequent during the financial crisis.

Denmark started the guarantee scheme, which covered deposits and the claims of unsecured creditors in about 133 banks, as part of an effort to soothe a nervous funding market. The guarantee expired about four months ago. At the time, Denmark's economy minister said the country's banks had enjoyed plenty of opportunity to snap up liquidity. However, some analysts reported deposit outflows and a run-off in senior bank debt at Amagerbanken after the program's expiry.

Analysts at CreditSights estimate that holders of Amagerbanken's senior debt and deposits over the €100,000 mark can expect a haircut of 41 per cent. That is based on Finansiel Stabilitet paying a preliminary sum of 15.2 billion kroner ($2.77-billion U.S.) for the bank's assets, covering about 59 per cent of unsecured senior liabilities.

"It is difficult to gauge the implications for the wider banking system in Denmark and Europe," CreditSights wrote. "While such action is easier in respect of a relatively small bank, this might well set a precedent for the way failing banks are treated in other jurisdictions."

In spite of the rarity of actual losses for senior bondholders in banks, European regulators have been moving steadily towards forcing haircuts on senior bank debt. The idea is that sharing losses will ease the burden on taxpayers. However, many analysts expect an increase in the cost of bank funding as a result. Haircuts on subordinated bank debt, which traditionally ranks below senior in the event of a bankruptcy, have become one way of forcing losses on to private investors.

The deterioration in Amagerbanken's financial health might come as a shock to investors and depositors. The bank had a tier one capital ratio, a measure of balance sheet strength, of 13.9 per cent and a core tier one ratio of 8.8 per cent at the end of September.

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