Denmark doubles capital buffer to contain wider Danske Bank risks

Finance provides slight convenience and a few useful products (like mortgages). The vast majority of the financial sector does nothing significant to the outside world, and often just cause negative side-effects.

A good story to tell here is the total bank strike in Ireland that lasted a year, where everything operated just fine without the banks.

tonyedgecombe• 8 years ago

https://en.wikipedia.org/wiki/Financialization

aedron• 8 years ago

Arguably worse than worseless, when it is actually destructive to society.

The history of banking in most countries is the story of a repeated cycle of abusing the trust of the people with money in the bank: The bank holds people's gold -> the bank issues 'gold certificates' -> the bank issues more certificates than it has gold -> system crashes and everybody loses their money.

In the end, the establishment of national banks to regulate/nationalize the appropriation of wealth.

Here is the history of the Swedish national bank, as an example (it could be copy/pasted from every other European national bank): https://en.wikipedia.org/wiki/Sveriges_Riksbank#History

safgasCVS9• 8 years ago

So I'll void preaching to the choir and give you this little gem instead http://uk.businessinsider.com/pubs-replaced-banks-in-ireland...

krona• 8 years ago

The industrial revolution would never have happened if not for the revolution in finance that preceded it.

safgasCVS9• 8 years ago

The industrial revolution was driven by the increasing adoption of coal as a shift away from burning wood and other biomass allowing for highly energy intensive industries to develop. Steam engines, massive smelting furnances etc couldnt function without the huge energy efficiency gains from the shift towards coal. That shift was driven entirely by thermal efficiencies gained. Finance powerful though it may be doesnt outrank thermodynamics

zimablue2• 8 years ago

I await your plan for a society with no markets.

arghwhat10• 8 years ago

No financial sector does not mean no "markets". It means no providers of financial products.

However, some financial products emerge naturally between individual parties, such as credits and small-scale loans. I think the most noticeable loss would be the lack of mortgages (i.e. having to pay for a house up front). No simple means for online purchases would also be inconvenient (Bitcoin is still not a viable normal solution).

Didn't Ireland have a complete and total bank strike for a full year in the 1970's, with absolutely no negative side-effects?

safgasCVS9• 8 years ago

Comrade, when the workers take over there will be utopia for all!

Jokes - there's nothing wrong with a sensible financial sector but our current over-financialised world of financial speculation with the public being required to bail out financiers is dangerous and needs to be reigned. This to me is just another example of how useless a good chunk of modern finance is

kenmicklas• 8 years ago

Finance and markets are not the same thing though.

kome• 8 years ago

Finance is needed. Better questions would be:

- How much finance is needed? And how complex?

- Are financial actors capable of seeing a crime when they see it, or pecunia non olet?

There is widespread, high-level, white neck, corruption in northern Europe. And that just the tip of the iceberg.

sctb• 8 years ago

If that's true then presumably one doesn't need to point it out with snarky one-liners (which don't belong on Hacker News).

https://news.ycombinator.com/newsguidelines.html

krn• 8 years ago

What this article doesn't mention, is that Denmark is facing all these issues now, because Danske Bank's Estonian branch was used to move vast sums of money out of Russia by the people close to Russian government and Vladimir Putin himself, using the scheme called "The Russian Laundromat"[1]:

FSB representatives served on the board of at least one of banks that wired billions out of Russia as did Igor Putin, Putin’s cousin. He was a manager and executive board member in the Russian Land Bank.

[1] https://www.occrp.org/en/laundromat/the-russian-laundromat-e...

gadders2• 8 years ago

There is a theory that Vladimir Putin is the actual richest man in the world.

arghwhat10• 8 years ago

Who can beat privately owning an entire country?

saiya-jin2• 8 years ago

Probably not true, but he is indeed super rich. If common state-media-brainwashed folks in Russia knew how rich he is, and all of it is stolen from all Russian citizens bit by bit (actually billion by billion), they would hang him on the nearest street light unceremoniously.

I would expect that he diversified his wealth all over the world via 'friends', stored in shady wealth management companies, well located banks, and probably few tonnes of good old $$ and gold. Some bankers in one Zurich bank might give you some info (but might not be alive to confirm it afterwards).

But he has good PR - it often looks ridiculous to western eyes, but for most russians it hits some obscure sweet spot. And of course he is not some lone wolf, rather guy on top of a massive pyramid with tons of FSB people who know their stuff a bit too well.

Who else would you be expecting to run huge broken country like Russia for so long so successfully? I mean, even Arafat died as a billionaire, and Palestine ain't some Eldorado to begin with.

drb914• 8 years ago

Probably, even if not in asset value. He can make more money for himself if he wants.

cryoshon• 8 years ago

i've heard his wealth estimated at $200 billion USD. but at this point i don't think it matters. he has an entire country.

arghwhat10• 8 years ago

An interesting thing to note for those that care:

Danske Bank has acquired several banks over time, and integrated them into the brand. The Estonian branch is such an acquired bank.

After being acquired, the normal procedure for Danske Bank would be to move the newly acquired bank completely over to Danske Bank's banking platform. This platform includes all the Danske Bank business logic and procedures, such as money laundry checks as per EU regulations.

However, in this specific case, it was deemed too expensive, and the new branch was left as is, running its own banking system separate from the rest of Danske Bank.

Someone responsible for that decision, which effectively left that new branch to its own devices, is probably having a bit of a bad taste in their mouth right about now.

baq• 8 years ago

Someone responsible for that decision, which effectively left that new branch to its own devices, is probably having a bit of a bad taste in their mouth right about now.

or not. we're talking about laundering Putin's money. it's not inconcievable that this decision was at least indirectly influenced by the Kremlin.

arghwhat10• 8 years ago

Having had a connection to the industry at the time, I'm quite sure that the decision was made simply as a money/frustration saver. Banking systems are the worst pile of horse-dung in existence, and no one wants to touch it if they can avoid it. It's expensive and cumbersome, and the leadership will go through great lengths to not wake the sleeping monster and risk having the card house collapse.

So, I am fairly confident when my blame-o-meter is reads "incompetence" rather than "malice".

talltimtom• 8 years ago

Someone responsible for that decision, which effectively left that new branch to its own devices, is probably having a bit of a bad taste in their mouth right about now.

Why? Their reasoning then was that it would cost them to much to transfer the bank, “discover” the laundering and paying fines, instead they left it so they could earn more money by the time it was eventually “discovered”.

These aren’t kindergartners running these banks and systems, they knew what was going on. They likely did make the right choice, the fines will be the same since now as they would have been then, and now they have a large profit to pay them from.

arghwhat10• 8 years ago

This explanation is a bit too far fetched.

The effort to move the bank to their own banking system is on itself a tremendous effort. We're talking calendar years of implementation time, huge risks and a stall of most other development. The leadership knows that their banking systems are a pile of bleeding horse dung that they wish to avoid touching at any cost.

They are not kindergartners, but they are not omnipotent either. Knowing that the Estonian bank had improper processes would by itself require a lot of work to discover, and figuring out if this has been abused would likely be quite a massive task. Doing the move to the new business logic would reveal the issue, but not before it was done.

Never attribute to malice what can be sufficiently explained by incompetence. What we see here can be explained with just a little bit of incompetence, or an extreme amount of malice. The former is far more likely.

makomk• 8 years ago

On the other hand, as TSB recently demonstrated, moving acquisitions over to the parent bank's platform isn't exactly risk-free itself.

martin_bech• 8 years ago

Ill bet it was done intentionally.. some years 10% of Danske Banks total profits, was from this one branch..

They where warned multiple times, that the clientele of that branch, was shady. This was an Estonian Branch, with primarily non estonian customers.

arghwhat10• 8 years ago

If I recall a talk with a Danske Bank employee correctly, only the Estonian branch itself saw the profits for this fraud, with the Danish branch not benefiting from it.

However, my memory and interpretation of this chat may be incorrect. Economists and engineers do have a slight linguistic mismatch.

chvid• 8 years ago

There has been a money laundry scandal in its Estonian branch of epic proportions.

The risk is now a massive fine to Danske Bank. Not by the Danish state. But by either the EU or more likely the Americans.

Danske Bank is the biggest bank in Denmark with +50% of all banking business. It is a liability of the Danish state meaning that if it gets in true trouble the state will bail it out.

hocuspocus• 8 years ago

the state will bail it out.

Would it be that bad? From my simplistic understanding of economics, the Danish central bank can bail it out with minimal side effects, right? And the state would be in a position to ask for a commensurate compensation.

lordnacho• 8 years ago

The state already bailed out the banks, including this one, back in 2008. Denmark has a larger banking sector relative to the economy than most countries, and the politicians thought it was a good idea to bail them out.

What's scandalous is they didn't insist on wiping out the shareholders.

charlesdm2• 8 years ago

Actually, the share and bondholders will be required to bail it in, under EU laws introduced a few years ago.

drb914• 8 years ago

Yikes. Sounds shitty for EU residents in the long term. Wouldn’t it be better to let the bank fail, ie learn from 2008 that bailing out encourages the bad behavior?

qubax• 8 years ago

Except if it is a too-big-to-fail bank and there is systematic risk, the taxpayers will have to bail it out. A bank that controls half a nation's banking is systematic. The government will bail it out. If things get bad, the EU/ECB will bail it out.

One of the benefits of running large banks ( and insurers ) is "privatize profits and socialized losses". These bankers and insurers can't lose. If they gamble and win, they get the rewards. If they gamble and lose, everyone else has to foot the bill.

interfixus• 8 years ago

Not to worry. I have been staunchly admonished in a Danske Bank branch for attempting to pay a bill of roughly $50 (a laundry bill for an old lady of my acquaintance) without being able to produce the required official ID. I was clearly a terrorist pedophile laundering drug-money for the Russian mafia.

samstave• 8 years ago

If you have not already watched it, Watch "Active Measures" about the Manafort/Putin/Trump money laundering ties...

The reason I mention this here is that the former President of Estonia is interviewed in the documentary a bit.

I was wondering why would they be interviewing the President of Estonia regarding the Russian Mafia/Manafort/Trump laundering -- Welp - this is why.

cirgue• 8 years ago

This is a somewhat minor point, but it surprised me that the edit: Danish reserve requirement has been raised to 1%. In the US, it's at roughly 10% and has historically been between 8 and 12% for large banks. Does anyone more familiar with Danish banking know why their reserve requirement is so low compared to ours?

wjnc• 8 years ago

It's Denmark, not the Netherlands we are talking about. Your intuition seems correct [1]. The 1% capital requirement in the Reuters article must be an add-on requirement and is to low to be the stand-alone requirement. Fitch put Danske at 4.2% Basel III 'fully loaded' last summer. The wiki points out how diverse the calculations can turn out so that it's pretty much pears and apples comparing these internationally.

[1] https://en.m.wikipedia.org/wiki/Capital_requirement

venantius2• 8 years ago

The 1% refers to a specific sub-segment of the overall capital requirements. This would be on top of any normal Basel III requirements and is typically marked as a "discretionary" capital buffer to be set by the state in question.

EDIT: Ah, nuts, meant to reply to grandparent rather than parent. Oh well.

btilly• 8 years ago

Question. Is it remotely possible that as Danish financial institutions attempt to simultaneously increase their capital reserves, that will suck enough money out of circulation to start a deflationary spiral? In other words that the attempt to contain the risk can cause a crisis?

venantius2• 8 years ago

It's possible but pretty unlikely. The capital buffers being introduced are about 1% of Danish banks' balance sheets, and it's likely that the capital buffer for this was previously non-zero (e.g. likely 0.25% or 0.5%). So an increase of 0.5% or 0.75%.

And it's worth keeping in mind that a lot of banks, for governance reasons, will already have been holding in excess of the regulatory requirement. So it's not as if most of the banks will have to come up with this money suddenly - it'll already be there and available.

That's not to say that it's not a large amount of money in absolute terms, but relatively speaking if they were to reduce their loan origination for the year they have to come up with the money be something like 2-3% they'd be totally fine. That's not exactly going to kill the economy.

gpvos• 8 years ago

The problem is that many banks are too big to fail. So we increase the reserves that banks must keep to protect against economic shocks. Result: small banks cannot manage anymore, no-one can enter the financial arena, more banks are too big to fail.

occamrazor• 8 years ago

Actually the regulations already prescribe additional capital requirements for larger institutions, the so called SIFI.

Bucephalus355• 8 years ago

Doubling capital buffers providers surprisingly little protection. I can’t criticize the move but still, in an era of fractional banking where investment banks (really hedge funds that have a banking license) are leveraged 30 to 1 on a good day...things can get bad quickly.

Denmark doubles capital buffer to contain wider Danske Bank risks

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