Too big to fail – at least half of the Danish banks should be liquidated by the state

A big story in Denmark or at least a big story to the ones that cares is that a big proportion of the Danish banking system has been receiving guarantees so that they will not fail. The state and there by the citizens of Denmark, have vowed that no matter what they do and what decision that take, that we in the end will come and rescue them from themselves.

But is this really in the best interest of the country? Or even a viable way to solve the crisis that we are in the mist of?

There are some 120 banks in Denmark at the moment, which is about one bank per 45,000 Danish citizens. In Germany there by comparison around 350 commercial banks, which calculate to around one bank per 231,000 citizens. While the number of banks per citizen is decreasing it is very far from any kind of sustainable structure.

At the same time a lot of banks are now trying to get into a very exclusive club of “too big to fail” institutions. The members are in reality guaranteed to be financially subsidized by the Danish state no matter how stupid or arrogant that they choose to be in the future. Many of these institutions only operate on a local or regional level and have a great deal of vulnerability especially towards the construction sector. It is estimated that just of these 20 banks will need around 20 billion Euros within the next few years just to be kept afloat. Even for a well-off country like Denmark this is a significant chunk of the GDP.

So the question is if we should take these vulnerary banks and liquidate them and thereby minimize the loss to society or should we wait and see what happens? These is of cause the dilemma that these are in essence private businesses but if they think of them selves as too big to fail should we not at least have some control over the process and governance within these companies. These is not doubt that selling the good assets now will bring in a significant bigger return compared to the price we can get when the bank is no longer sustainable and the subsequent loss on the bad assets is something we would have had to endure anyway.

Another benefit of liquidation of smaller regional and local banks has to do with governance. We have now seen numerous times that members of bank boards and executive management have been privately engaged with the people that they have been lending money. This close relationship have meat that common financial sense have been overridden by personal favouritism and to many second chances which in the end have meant that the banks commitment have been too deep and focused on a few companies in high risk areas. This have en essence meant that the risk exposure have been way to high and management have been willing to hide the exposure to other clients because of their personal commitment. And effort to liquidate will at least in theory bring a arms length approach back into the lending practices or at least enable institutions to spread their risk on a much wider field of different industries and individual companies just because of their size.

One final note is that the banks should not be owned or operated by the state but merely be sold off in pieces so that clients and “good” lenders continues to be provided with a banking service that they can rely on. A actually think that the state would properly be the worst place to have a operating government involved as it would easily be soon as a cheap place for getting funds for political projects. But on the other hand I think it is unwise to have so many banks in one country when it is so clear that it is not something which the country can even hope to be able to sustain.

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3 thoughts on “Too big to fail – at least half of the Danish banks should be liquidated by the state

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