Are small states regulatory price takers?

The case of Denmark and the

financial crisis*
Paper prepared for presentation at Centre for Comparative Welfare Studies, Aalborg University, 28.
October, 2010.

By Martin B. Carstensen, Centre for Comparative Welfare Studies, Aalborg University

Abstract: In terms of implementing tighter regulation of the financial sector following the crisis of 2008, Denmark
stands out as a first-mover. Both in the number of new policies and the scope of interventionary discretion now assigned
to the Danish FSA, the Danes have thus done quite a lot compared to other Western states. This is surprising
considering the Lilliput status of Denmark. One would expect Denmark to do like other Nordic small states: wait for the
big players and follow their lead, but instead Denmark has introduced laws that much strengthens the FSA's supervisory
authority, while passively waiting to implement European Union-standards in the area of capital adequacy standards. It
is argued that the perception that a much strengthened FSA would not hurt the competitiveness of Danish banks coupled
with a domestically based political need to handle the specific problems of the Danish financial sector, made the
government move much further and faster than other small states. The Danish case attests to the importance of the
perception of vulnerability in explaining variance in the behaviour of small states in world markets and demonstrates
how small states are able to implement significant institutional and ideational change in one area while bucking the
trend in another.

Introduction
When the financial crisis hit in September 2008, the Nordic countries did what was expected of
them: they provided liquidity to the dried up banks of their respective countries, they sought to
shore up the trustworthiness of their financial institutions by offering state guarantees of deposits,
and they injected capital into the banking sector to support the credibility of banks and thereby
enable a re-entering on the international money markets. In other words, they did what we would
expect small states in world financial markets to do: buck the trend trying to adjust to the game of
big players, while waiting for new regulatory policies to come along from international
organisations. The reaction is in line with the message of Katzenstein's (1985) classic work, Small
States in World Markets. Contrasting the strategies of large economies like statist Japan and liberal
USA with smaller European economies, Katzenstein (1985: 24) argued that “For the small
European states, economic change is a fact of life. They have not chosen it, it is thrust upon them”.
Through corporatist institutions and a balancing of economic development and political preferences,
small European economies, according to Katzenstein (1985), pursued a reactive, flexible and
incremental pursuit of economic adjustment to the new circumstances of de-industrialization in the
1970s. In this perspective smallness matters, because in small economies elite actors can easier fit
around a table and create consensus around a flexible and adaptive reaction to outward
circumstances. In another seminal piece on the capacity of small states to handle international

* Thanks are due to Jørgen Goul Andersen, Cornel Ban, Marjo Koivisto and Christian Albrekt Larsen for commenting
on previous versions of the paper. A special thanks to Mark Blyth for giving me the idea for the article, commenting
on the paper as well as acting as an excellent host at my stay at the Watson Institute of International Studies, Brown
University, in September 2010. All remaining weaknesses are of course mine.

1
pressures, Herman Schwartz (1994) argued that the small open economies of Denmark, New
Zealand and Sweden handled increased international competition by re-organising the state-society
nexus through the introduction of market discipline in the public sector, demonstrating that
international economic pressures rather than creating political rigidity might instead generate a
coalition of political actors determined to change political arrangements and the state. This showed
that small, open economies are able to act with some force in their reactions to the international
economic system.
The work of Katzenstein and Schwartz primarily deals with the real economy, but their
analyses are also relevant to the study of how small states regulate their financial sector. Thus,
applying the analytical logic about small, open economies to the context of financial regulation, it is
easy to see why countries like the Nordic would choose a strategy of wait-and-see. With the last
thirty years of institutionalisation of financial regulation at the international level – most clearly
represented by the implementation of the Basel-accords by the Western nations and regulatory
standards being promoted across the world by the G7 and international financial institutions after
the 1990s (Helleiner and Pagliari, 2010) – it has only become more difficult for small economies to
stray from the crowd. And so, unsurprisingly, we find the Nordic countries waiting for new
regulatory measures to be presented by the European Union (EU) and The Basel Committee on
Banking Supervision.
However, this is only part of the story. When sifting through the post-crisis legislative and
regulatory initiatives of Denmark, Norway and Sweden, an interesting difference between the
countries grabs the eye: No really significant legislative initiatives have been implemented in either
Norway or Sweden1, whereas the Danish FSA has been mandated with quite powerful regulatory
instruments. Examples comprise a significantly strengthened mandate to dismiss managers and
board members that do not live up to 'fit and proper'-standards; the possibility of ordering financial
institutions to conduct an investigation by an external actor paid for by the financial institution
under scrutiny; and a mandate to intervene in troubled financial institutions at an earlier stage than
previously possible based on supervision and critique of the business models of financial

1 In both Norway and Sweden new initiatives have been taken in wake of the financial crisis, but as we would expect,
changes were few and small in scope. The Swedish FSA has since 2009 been working on a proposal for new rules
concerning the handling of liquidity risk based on the Basel Committee- principles, which is expected to be
implemented by January 2011 (The Swedish FSA, 2010). The Swedish FSA has also changed the regulations
governing the calculation of discount rate for life insurance companies, and implemented a proposal to penalise
loan-to-value ratios above 85 per cent to provide assurance against the possible macroeconomic consequences of a
housing market that was still going strong despite the crisis. These initiatives, however, are primarily driven by the
EU's CRDII-directive. A few regulatory measures were also taken by the Norwegian FSA, e.g. drafting a law
provision securing litigation rights for bond issue trustees as well as authorising the FSA to temporarily prohibit
covered and uncovered short selling (The Norwegian FSA, 2010). In both countries, commissions have been
established to study the financial crisis and provide proposals for reform.

2
institutions. The significance of these policies is corroborated by a comment from the conservative
Minister of Economics and Business Affairs, Brian Mikkelsen, stating that

“it is completely unique in a capitalist society that a public authority can decide that a
manager does not have the qualifications to do his job. But that is what we have felt
compelled to do” (quoted from Aagaard and Hansen, 2010) 2

According to the minister, the power given to the Danish FSA is 'second to none' compared with
other countries. The director of the Danish Bankers Association (DBA), Jørgen Horwitz, would
probably agree, albeit with much less enthusiasm. As he has noted: “The FSA now has so wide
authority, and has moved so far into the engine room of the banks, that in the future it may be
unclear who actually has the responsibility when something goes wrong in a Danish bank” (quoted
from Epn.dk, 2010).
The argument of this paper is three-fold. First, if we are to understand why a small state like
Denmark is going it alone in one area of financial regulation, while waiting for the big players in
another, it is necessary to build an analytical framework that incorporates perception as a central
variable in explaining small state behaviour. Economic vulnerability is neither static nor purely
structural, which makes it impossible to understand the actions of small states in world markets
only with reference to their structural position. Rather, and second, we should employ a broader
understanding of the motivations of actors to appreciate the cross-pressures levelled at them,
assigning special attention to the domestically based political and public pressures governments are
faced with. For example, in the Danish case, the primary reason that the FSA was beefed up by the
government was a frustration over the bank crises of the boom period of the 2000s, where
mismanagement and too lax credit policies led to enormous losses and banks going bust – and the
government taking a large part of the bill for the clean-up. Thus, the considerations behind the
relatively radical reform of financial supervision in Denmark were based in domestic politics, and
less with an eye to the competitiveness of the Danish financial sector. On the other hand, the
politicians did not want to go it alone in 'heavier' areas like capital adequacy standards for exactly
the reason that such unilateral measures would blunt the competitive edge of Danish financial
institutions. The Danish case is thus illustrative of how politicians try to balance multiple pressures,
from both the domestic and international level, to arrive at their preferred position in world markets.
Third, the paper emphasises how the institutional heterogeneity of financial regulation means that
going it alone is not necessarily a one-dimensional choice between straying from the flock or not.

2 All quotes are translated by the author unless otherwise stated.

3
Rather it is possible to move in one area, while following international trends in another. In times of
crisis there are often political advantages to be gained from such a strategy because it enables
governments to demonstrate political vigour while at a fundamental level simultaneously keeping in
line with the big states.

How can small states be first-movers?

The scope and radicality of new Danish regulation for the post-crisis era makes Denmark the odd
one out compared to other countries. Not surprisingly, the Danes are not going ahead with new
policies on matters like capital adequacy rules, risk- and liquidity management rules, etc. – like
other Western countries they are waiting for the Basel III proposal and will in all likeliness
implement most of the new regulatory policies through their membership of the EU – but in other
areas new policies have already been implemented. Contrasted to small states like Norway and
Sweden, then, Denmark is acting like a first-mover. The Small States-literature is not immediately
helpful in explaining the variance between Denmark, Norway and Sweden as well as the variance of
pro-activity in different areas of Danish financial regulation. As noted by Ingebritsen (2006: 287)
the literature works with the 'pessimistic' assumption that small states are 'price takers' and inherit
the rules of the game. Though it should be acknowledged that indeed Katzenstein's (1985)
analytical framework does leave room for political agents to actively learn and deliberate within a
corporatist setting, and thus not simply act as yes-men – as evidenced by a more recent piece
(Katzenstein, 2003) hailing the “remarkable learning capacity of small states” (p. 17) – the primary
emphasis is on more or less functional adaption (Mjøset, 1987), rather than active reworking of
institutions or going it alone.
Later work employing Katzenstein's logic of small states have done more to emphasise the
flexibility, creativity and heterogeneity emanating from institutions of corporatist concertation and
deliberation in small states. For example, in an edited volume devoted solely to the study of
Denmark in the world economy (Campbell, Hall and Pedersen, 2006), and building on the Small
States- and Varieties of Capitalism-literatures, focus is on the 'negotiated economy' of Denmark that
through historically entrenched institutions and a shared perception of geopolitical vulnerability
enables a high degree of consensus building through cooperation and policy learning. Pedersen
(2006a: 247), in the same volume, thus argues that in negotiated economies like the Danish,
“collective learning and policy flexibility are facilitated by the development of a particular
socioeconomic discourse and the founding of a generalized system of negotiation”. Pedersen
(2006a: 248) also identifies the discursive frame within which Danish competitiveness is created as
one that “views Danish economy as an open economy that, being exposed to international

4
competition, must find ways to become and remain internationally competitive”. According to
Campbell and Hall (2006), the institutionalisation of deliberation and negotiation between the
central political and economic actors, and the ensuing flexibility of the economic system, has
enabled the Danish state to act quite successfully in the world markets. They thus echo the later
Katzenstein's (2003) increased focus on the learning ability of small states and also Schwartz'
(1994: 554) argument that despite the very extremity of their position, small states are able to do
quite a lot on their own.
The problem with these theoretical perspectives in studying the Danish case of financial
regulation following the financial crisis is that they cannot explain the variance in degree of pro-
activity between different areas of financial regulation: Denmark is implementing radical reforms in
one area (financial supervision), while bucking the international trend in other areas (e.g. capital
accords). As pointed out by Mjøset (1987: 406) “Katzenstein treats the external pressure only as a
process of continuous change, and thereby fails to specify...the sectoral specificities of the export
sectors of different small economies”. To understand why the Danes are moving quite differently in
different areas within the same policy area, we need a conception of actors that gives more flesh to
the process of institutional change and the creation of institutional heterogeneity. The efforts of
Streeck and Thelen (2005) to establish a more grounded, 'realistic' concept of social institutions in
political economy is helpful in that regard, because it emphasises how actors are able to work
creatively and strategically within the institutional setting to create a significant degree of
institutional and ideational heterogeneity.
According to Streeck and Thelen (2005:14), institutions are never self-evident but always
subject to interpretation: "applying a general rule to a specific situation is a creative act that must
take into account, not just the rule itself, but also the unique circumstances to which it is to be
applied". In the face of uncertainty rule takers work creatively to fit the rules to existing and future
circumstances. As Jackson (2005) points out in the same volume:

"The social boundaries and interpretations of what an institution demands or allows may
remain ambiguous. Ambiguity leads actors to continually reinterpret institutional
opportunities and constraints, as well as adapt and modify institutional rules" (p. 230).

Actors thus revise rules in the process of implementation, making use of their inherent openness
and under-definition. Streeck and Thelen (2005) sum up by emphasising that institutions are

"continuously created and recreated by a great number of actors with divergent interests,

5
 varying normative commitments, different powers and limited cognition. This process no
actor fully controls; its outcomes are far from being standardized across different sites of
enactment; and its results are contingent, often unpredictable and may be fully understood
only with hindsight" (Streeck and Thelen, 2005: 16)

This approach thus emphasises how the heterogeneity of institutions provides resources for actors to
creatively challenge and contest the workings of the institutional system (Crouch and Keune, 2005).
How is this approach to institutional change helpful for understanding the Danes going forward
with quite significant reforms of financial supervision despite their status as a Lilliput in the
financial markets? First, the insight that rules are never self-evident but always subject to
interpretation, helps explain why a country might go it alone by referring to their specific
interpretation of international competition. The logic that small countries always have to follow
larger countries rests on the assumption that the fear of the retaliation of larger countries keeps
smaller countries from acting on their own. However, as later emphasised by Katzenstein (2003:
11), what really matters politically is the perception of vulnerability. This perception might often be
different between different policy areas as well as within a policy area. Indeed, in the Danish case
politicians perceived that it would not seriously harm the competitiveness of Danish banks in
international markets that the FSA was strengthened, whereas the political system did nothing to
make Denmark stand out in the area of capital regulation, because it was believed to put Danish
banks behind their foreign competitors. What was decisive, then, was the interpretation and
perception of competitiveness. The international markets create a frame for the actors that is
interpreted and acted upon, and it is thus not possible to derive the actions of small states from their
'objective' position in world markets.
The importance of interpretation of vulnerability for small states is also emphasised in many
of the contributions in Campbell, Hall and Pedersen (2006). According to the authors national
identity – for example an identity of geopolitical vulnerability – plays a pivotal role in creating a
culture of cooperation and consultation that might help small states perform successfully in world
markets. Though the effort to bring in culture and national identity as a central variable in
explaining small state behavior is laudable, it is less helpful in explaining more concrete policy
processes as for example the case of Denmark's new regulatory model of financial supervision. The
primary reason is that a variable like 'national identity' is placed so far back in the causal chain, that
it is difficult to connect to the concrete preferences and perceptions of actors within the same
relatively broad national identity, and it thus does better at explaining continuity in policy areas than
variance within them.

6
 Second, the approach of Streeck and Thelen (2005) allows for a greater degree of
institutional heterogeneity than the Small States-literature normally permits. Indeed, Streeck and
Thelen (2005) points out that institutional heterogeneity is much more widespread than normally
recognised in institutional theory, and that this heterogeneity may function as a resource for actors
trying to change institutions. As a kind of bricolage, institutional elements may be rearranged and
new elements blended in a new and creative way (Campbell, 2005, 2010; Carstensen 2011). As
argued by Campbell (2010: 99) “even within well-established institutional orders there is much
institutional flotsam and jetsam – bits and pieces of previously attempted models and parallel paths
– that actors can use to fashion new institutional arrangements”. It thus allows for multiple
regulatory models to exist side by side. Again, as will be analysed below, with the reforms of the
Danish FSA, a significant degree of heterogeneity now exists in the Danish model of financial
regulation. On the one hand we see a strong FSA armed with the ability to determine the legitimate
business model of Danish financial institutions, dismiss management and board members and
intervene with reference to 'external circumstances' such as (a subjective assessment of) financial
stability, and without any law necessarily being broken. On the other hand, the Danes are following
the international recommendations coming from Basel III through the EU and will in all likeliness
implement the new international rules at high speed. Political actors are thus able to put together
quite heterogeneous regulatory model if it serves their purpose and the necessary political and
public support is mustered.
Third, with their emphasis on the creative and strategic work of actors to change institutions
to fit their interests, Streeck and Thelen (2005) presents a type of actor able to take multiple logics
into consideration in processes of institutional change. The theory of Small States presented by
Katzenstein (1985) focuses strongly on the corporatism of small states, with emphasis on how
actors – due to the economic vulnerability of their country – are able to construct accommodating
and flexible policies in relative consensus. In turn, the multiplicity of considerations that
decisionmakers are confronted with are underemphasised. Of special importance is the national
political context in decisions regarding how a country places itself vis á vis its competitors. As
argued below, the primary reasons for the Danes going it alone in the area of financial supervision
are found in the experience of the Danish financial and political systems, specifically a political
frustration over the mismanagement and irresponsibility of Danish banks in the boom period of the
2000s. Thus, an analytical framework dealing with how small states handle international
competition in areas like financial regulation, should allow considerable room for explanations
grounded at the national level. The Danish case attests to the complexity and multifaceted nature of
decision making in small states by pointing out how actors have to weigh a multitude of both

7
national and international factors against each other before arriving at a policy choice. With a
combination of the insights from the Small States-literature and a more dynamic conception of
institutional change, it is easier to identify the multiple constrains that political actors are faced with
in decisions to buck the trend or move forward on their own.
The emphasis on the importance of interpretation and perception echoes recent efforts within
discursive institutionalist scholarship to highlight the centrality of ideas and discourse in
explanations of political behaviour. Schmidt (2003) has already gone some way to incorporate
insights from ideational scholarship in the Small States-literature to explain the differences between
small state's welfare state adjustments. Arguing for the importance of the discourse among elites
and between elites and the public, called communicative and coordinative discourse respectively,
Schmidt (2003) contents that stronger focus should be on “how the small states are able (or not) to
create an interactive consensus for change that enabled them to overcome entrenched interests,
institutional constraints and cultural impediments to reform” (p. 128). Schmidt thus rightly points
out the lack of attention given to what happens at the table when the actors have been fitted around
it, that is, how the specific perception of vulnerability is established. According to Schmidt,
coordinative discourse is useful for ironing out differences and negotiating a common
understanding of the problems at hand as well as the range of viable solutions. The common
understanding between elites thus rests on shared normative and cognitive ideas, which form the
basis for accepting new institutional practices.
This is in line with the argument of Culpepper (2008) that “continued uncertainty
characteristic of periods of institutional experimentation creates a bargaining context in which the
logic of arguing...constrains the logic of consequentialism” (p. 3). In periods of crisis, where the
existing institutional setup has been called into question – a description that clearly fits the time
after September 2008 – processes of creating what Culpepper terms 'common knowledge' start.
Before new institutions emerge, “There is a real game of figuring what is going on in the world
after the onset of institutional crisis” (Culpepper, 2008: 6), and in this process the logic of arguing
(Risse, 2000) plays a central role in creating a common understanding of vulnerability among
political actors. The process of arriving at a strategy for the small state in world markets is
characterised by some degree of uncertainty – or as Pedersen (2006b: 457) calls it: a high-risk
environment (cf. Hemerijck and Schludi, 2000) – because the small state cannot mechanically
derive its best response to international pressure from its structural position in the international
economy and economic success depends on the capacity of the elite to develop national strategies
for adaptation. Thus, actors included in the corporatist institutional setting must, in the words of
Risse (2000: 7), establish a “communicative consensus about their understanding of a situation as

8
well as justifications for the principles and norms guiding their action”. To understand why small
states act as they do, then, it is necessary to study their perception of the world, and more
specifically, their perception of vulnerability. This perception is framed within a national identity
(Campbell and Hall, 2006), and in the area of financial regulation established between policy elites
ironing out their differences by creating common knowledge and a coordinative discourse to agree
within3.
By coupling the literatures on small states in world markets with Streeck and Thelen's
(2005) more dynamic approach to institutional change as well as the discursive institutionalist focus
on processes of interpretation and perception, it is thus possible to establish a more nuanced
approach to analysing how Lilliputs are able to go it alone even in areas as internationalised as
financial markets. It alerts us to the fact that the position of small states is above all a perceived
position, a position that strategic actors are able to work with and around to satisfy domestic
demands for change. It is thus not possible to deduce from the structural position of a small state
like the Danish that it should follow the lead of the big players. Rather, the actors taking part in the
corporatist negotiations over a reasonable answer to structural constraints are able to take advantage
of the institutional and ideational heterogeneity of financial regulation by moving in their own
direction in one area, while staying on track with the big states in another. In the following it will be
argued 1) that the Danes have implemented quite radical reforms of financial supervision and 2)
that they have done it for domestic, political reasons – primarily due to the perception that the
Danish financial crisis came from different kinds of mismanagement in Danish banks that a
strengthened FSA is hoped able to counterbalance in a future boom. The case of Denmark thus
demonstrates how small states are able to stray from the big states in important policy areas while
keeping in line in others, attesting to the dynamic process of interpreting small state-vulnerability.
On a more normative level the Danish case might also inspire other smaller states eager to
implement more radical laws than currently on the table at the international level to satisfy domestic
political and public demand for action in times of crisis.

The financial crisis in Denmark

Financial markets in Denmark were strongly affected by the global financial crisis that materialised
when Lehmann Brothers filed for bankruptcy on the 15. September 2008. Markets reacted with
shock to the fall of Lehmann Brothers, leading to a freeze up of international and domestic money
markets, in turn making it increasingly difficult and costly for banks to find funds for their day-to-
3 It should be noted that arguing for the importance of perception and interpretation in no way means that political
interests are assigned any less importance, but rather that actors use the ideas they have about the world, to
understand what their interest is in relation to specific policy choices (Blyth, 2002).

9
day business. Already before September, starting in the summer of 2007, Danish banks had
experienced difficulties raising liquidity on the money market (Nationalbanken, 2008). Some small
and midsize banks had due to their aggressive lending policy and comprehensive involvement in the
building sector experienced difficulties raising sufficient capital when asset prices started falling in
2007. Most prominent was the case of Roskilde Bank – at that point the 8. largest bank in Denmark
– where an overly risky business model with large exposure to the stagnating building sector led to
insolvency, and in the summer of 2008 the National Bank put the bank up for sale even before the
financial crisis had really taken off. Another problem was the large engagements of Denmark's
biggest bank, Danske Bank, in the Irish and Baltic markets, which made investors unsure what was
actually on the balance sheets of the bank and how it would be affected by an imminent devaluation
of its Baltic assets. More generally, Danish banks had between 2005 an 2008 build an enormous
deposit deficit – to a significant degree financed through loans from the international money market
– reaching the exceptionally high level of DK 624 billion at its peak in 2008.
When the financial crisis hit, the measures taken by the Danish state was – like in other
Western countries – focused on two overall challenges: sustaining financial stability – i.e. keeping
the financial system afloat – and keeping the financial crisis from causing too much turmoil in the
real economy. As goes for the latter challenge, the preferred policy choice was a mixture of
expansionary monetary and fiscal policy. On the monetary front, the central banks more or less
floored the lending rate to boost consumption and production, bringing the lending rate from 4,6 per
cent to 1,05 per cent in little over half a year. The expansionary monetary policy was complimented
by expansionary fiscal policies, where the net effect on the fiscal balance of the fiscal packages of
2008-2010 was -3,3 – putting Denmark on par with Sweden (-3,3 per cent) and the weighted OECD
average of -3,9 per cent, but still far behind Ireland's -8,3 per cent (OECD, 2009: 63).
A range of temporary measures were taken by the central bank to provide liquidity and
credibility to the Danish financial systems (e.g. creating temporary credit facilities, offering an
expansion of the collateral base, and creating an option to obtain credit on the basis of excess capital
adequacy), but these facilities were not used to any great extent by the Danish banks. More
important were the two bailout bankpackages (popularly called Bankpackage I and II). The first
bankpackage, presented on 5 October 2008, was a two-year state guarantee of all deposits
(exclusive of covered bonds, i.e. SDOs, SDROs and mortgage credit bonds). A considerable portion
of the guarantee, a maximum of DK 35 billion, was financed by the banking sector, and expenses
beyond this would be paid by the state4. With bankpackage I the state thus guaranteed DK 4.200
4 The financial sector was to inject a maximum of DK 35 billion (equivalent of 2 per cent of GDP) into a fund. A
potential deficit in the fund would be financed by the state – and a potential profit in the fund would be reaped by
the state. In 2009 the state expected to turn a profit from the guarantee, despite the considerable funds used to

10
billion in deposits. On January 18. 2009 the government and opposition agreed on the second bank
package (Bankpakke II, 'the credit package'). The aim of the policy was to create the necessary
conditions to boost lending by injecting state capital contributions into Danish credit institutions
that experienced difficulties raising necessary capital to stay solvent. In monetary terms this was
indeed a significant measure: If all credit institutions made use of the scheme, the state would inject
DK 100 billion into the sector5. With the credit package the government also introduced an
extension of the state guarantee – which expired on the 30. September 2010 – making it possible for
solvent financial institutions to apply for an individual guarantee for loans with a maturity of up to
three years (until 2013). As of June 2010, 63 institutions had been approved for individual
government guarantees totalling DK 364 billion (Finansiel Stabilitet, 2010)

Table 1: Relief measures since mid-2008

Increase Guarantee or Inject capital Fund asset- Ban or restrict
deposit buy bank debt backed short-selling
insurance securities
Denmark x x x x x
Norway Already high x x x
Sweden x x x x
Source: OECD (2009: 46).

The policy measures described above broadly aimed at keeping the Danish financial systems afloat
and alleviating the harshest consequences to the real economy. As illustrated in table 1 above, in
many ways the responses of Norway, Sweden and Denmark resemble each other. The specific
problems that the countries were facing did to some degree differ – the economic challenges were
for example larger in the Danish economy, and the Norwegian banks were not as exposed to the
crisis as the Swedish and Danish – but the responses to a large degree followed the same route. In
this the Nordic countries were not much different from the responses of other Western nations. As
Tsingou (2010: 25) argues, generally the first type of response from Western governments to the
financial crisis was a case-by-case approach to the predicaments of individual financial institutions

dismantle Roskilde Bank (Finansiel Stabilitet, 2009). In this way the state guarantee may very well turn out
profitable for the Danish state.
5 When the deadline for applications from individual institutions had expired on the 31. December 2009, 43
applications had been received, leading to a payout of 46 billion Dkr (apx $8 billion USD) (see
http://www.oem.dk/sw24222.asp). The Danish central bank expects the government's costs for financing of re-
lending and capital injections into banks and mortgage-credit institutes to be offset by interest payments from the
financial institutions. The interest payable on the capital injections averages 10.1 per cent, (cf.
http://www.nationalbanken.dk/DNUK/GovernmentDebt.nsf/side/Key_figures!OpenDocument).

11
(e.g. Northern Rock in the UK, Fed-supported buy-out of Bear Stearns by JP Morgan Chase in the
US) and the second type of response was in a systemic context wherein central banks injected
liquidity and capital and governments orchestrated bail-outs and take-overs. The Nordic cases fit
this trajectory.
However, one thing is the short-sighted handling of the emergency that the financial crisis
posed to the economic systems. Another thing is crafting new rules for a post-crisis financial
regime. This is a task that to a large degree – also in respect to much larger financial sectors like the
British or American – takes place between nations and private actors in international forums like the
Basel Committee, G20 and the EU. Despite these organs being trendsetting in the area of financial
regulation, however, the international system still leaves room for national implementation and
interpretation, not least because rules are often only recommendations and standards promoted in a
relatively fragmented, weak and exclusive institutional context which allows significant flexibility
of implementation at the national level (Helleiner and Pagliari, 2010). Still, it is a reasonable
expectation that Denmark – being a small, open economy – would wait for the larger economies
and international organisations to design rules to be implemented into the financial regulation of the
three countries. On this point, however, Denmark has shown itself as a first-mover unwilling to wait
for larger international initiatives.

Denmark as a first mover: New Financial Regulation in Denmark

The changes in financial supervision have occurred at both an institutional and ideational level, so
far resulting in a much more aggressive and pro-active FSA. The new supervisory approach was
presented already in November 2009, when the FSA published a new strategy (called Supervision
with an edge - Strategy 2011) with the explicit aim of creating a new approach to financial
supervision based on lessons from the financial crisis (The Danish FSA, 2009). The strategy
anticipated the legislative changes already underway by emphasising the importance of checking
the durability of the business model of financial institutions, and the systemic risk that individual
institutions pose. The new approach of the FSA is based on a number of new policies implemented
in 2009 and 2010 that aim at strengthening the supervisory capacity of the FSA (especially Law nr.
579, 1. June 2010). The new policies may be divided along the dimensions of increasing control
over the financial institutions; increasing the level of information in the market; and disciplining
banks and enhancing consumer protection. There is a long list of new regulatory measures that have
been taken following the financial crisis – varying broadly in significance and scope – and it is
beyond the aim of this paper to account for them all 6. Instead focus will be on the policies that have

6 A range of laws have been passed. To mention some: the FSA has been mandated to order external investigations of

12
meant most to strengthen the FSA as well as redefine the role of the state in relation to the financial
sector.

Evaluating the business model of financial institutions

First, at the most fundamental level, the FSA now evaluates the business model of financial
institutions – assessing whether the business model “contributes to the viability of the company”
(The Danish Government, 2009a: 27) – and if it poses a risk to general financial stability. In
consequence, the FSA is now mandated to define what a sound business model is and intervene
accordingly. According to the DBA, the FSA thus holds actual management authority over financial
institutions, and the interest organisation for insurance and pension firms, Forsikring og Pension,
has also noted that the possibility of intervention by the FSA with the reference to sustaining
financial stability is now almost unlimited (Hearing statement, 2009). The significance of the new
laws lies in the FSA's ability to assess financial institutions at a micro level, or put more popularly:
to review, criticise and ultimately change central parts in the engine room of banks. An important
reason for the supervision of the business model of financial institutions, is, according to FSA
director Ulrik Nødgaard, a wish to “counteract new, risky niche banks from sprouting” (quoted from
The Danish FSA, 2010b), or put differently: to limit the ways that banking business may
legitimately be conducted in Denmark.
Concretely the review of the business model is based on the FSA's 'supervisory diamond'. In
the experience of the FSA, Danish credit institutions that experienced turbulence in the financial
crisis (as well as in earlier bank crises) shared characteristics such as strong growth in lending at the
expense of credit quality, too optimistic assessments of credit risks (especially in relation to the
building sector) and a lack of management of large engagements (The Danish FSA, 2010). From
this perspective, the 'supervision diamond' states five value limits: the sum of large engagements
(<100 percent of base capital), growth in lending (<20 percent per year); exposure to the building
industry (<25 percent of total lending); stable funding (lending at a maximum 1,25 x deposits); and
>50 percent surplus liquidity of the minimum liquidity demand. A financial institution that exceeds
one or more of the value limits now (to a greater or lesser extent) may have an unsound business
model. The FSA also evaluates 'softer' criteria that are not measurable through accounting figures,
for example issues of (mis)management: “If the FSA senses that the management is not in control
of the situation or for example does not follow the approved credit policy of the institution” this will
financial institutions paid for by the institution itself; a new wage policy in the financial sector has been agreed by
the opposition and government; a ban on sale of the credit institutions' own stocks through loan-financing has been
implemented; risk labelling of financial products and certification of bank employees that advise consumers about
high risk financial products is expected implemented by the turn of the year; at which time the FSA is also expected
to be mandated to administrative fining of financial institutions.

13
be included in the assessment of the business model of the institution (answer by the Danish FSA to
query by the author, 4 October 2010).
The aim of the supervision diamond was in public presented as value limits useful for
shaming irresponsible banks by putting them in the pillory of the public eye. Director of the FSA,
Ulrik Nødgaard, explains:

“we want to create limits to how banking can be practiced. We will not manage banks
ourselves, but we will employ tighter limits for how banks can be managed (…) You
could say that we are fencing in the banks. The limits we are putting up will not affect
the typical bank but will catch the financial institutions that depart from the norm”
(quoted from Bentow, 2009).

The supervisory diamond is also used to determine when the FSA should intervene. As mentioned,
the FSA can in principle intervene when it deems the business model of a financial institution
unsound. According to the new law, the FSA must now intervene when it seems likely that a
financial institution in the shorter or longer run will lose its license, that is, without the institution
necessarily violating any laws. Before the new law was implemented, there had to be a 'significant'
risk that the institution would in the shorter or longer run loose its license, now there must only be 'a
not insignificant' expectation. The risk is judged against both inner and exogenous circumstances
(i.e. against the state of the financial sector as a whole). Examples of 'inner circumstances' are high
growth in lending or high exposure to the building sector, i.e. the limits stated in the supervision
diamond (The Danish Government, 2009a: 31).

Dismissing management with reference to financial stability

Second, the FSA now has a stronger mandate to dismiss management and board members. Earlier it
had been a problem for the FSA that even though it principally had the mandate to fire managers
and board members due to mismanagement, it was very difficult to do in practice. The reason was
that the the fitness of actors was judged against their ability to hold a position in the financial sector
generally, and the courts were very hesitant to judge a person unfit to work in a whole sector. This
meant that the ability to fire managers and board members had never been exercised by the FSA.
The new law states that the FSA can order an actor fired when the FSA finds reason to assume that
the actor will not be able to do his job satisfactorily. The eligibility of management should to a
significant degree be evaluated against the risk it poses to the financial system as a whole, and
assessments of 'fit and proper'-standards are now made continuously as part of normal inspection.

14
Thus, if the FSA, in the course of inspection, are made aware of overly risky behaviour or
mismanagement, the FSA must evaluate whether management lives up to the 'fit & proper'-
standards and if necessary order the director or board members fired.
The significance of the new law is based both on the focus that is puts on financial stability
as a criteria for judging management qualifications, and the discretion it gives the FSA in assessing
whether the person has acted in a way that gives reason to assume that the person in question will
(in the future) not manage the firm prudently. Compared to for example the British FSA's 'fit &
proper'-standards – which is confined to judging eligibility against personal attributes such as
integrity, competence and financial soundness – Danish regulation thus provides significantly more
discretion to the FSA by placing considerations of general financial stability prominently in judging
management qualifications.

Publicising supervisory reports

According to a controversial executive order from the FSA, credit institutions are now obligated to
publicise the FSA's risk-assesments, critiques (påtale) and orders (påbud). Again, comparing the
policy to British regulation, the significance of it is evident: According to British law “Neither the
Authority (the FSA, author's note) nor a person to whom a warning notice or decision notice is
given or copied may publish the notice or any details concerning it”
(http://www.legislation.gov.uk/ukpga/2000/8/part/XXVI/crossheading/publication). Compared to
Norway and Sweden, the new law puts Denmark ahead of the two other Nordic countries (answer
from FSA-official to email query from author, 7 October 2010).
Reports on developments leading to the breakdown of a financial institution must also be
publicly released. Before reports only had to be publicised, when the state had posed security or put
means at the disposal of the institution and only on the condition that the legal entity declared
bankruptcy. Following the new policy, a report is also publicised when the main part of the
operations of the financial institution is terminated or transferred to another legal entity 7 (The
Danish Government, 2009b: 11-12).

Taken together these new policies serve three overall purposes: to enhance the possibility of the
FSA to intervene at an earlier stage, to increase the level of information about financial institutions
and to delimit the legitimate type of banking business in the financial sector. The new law

7 This has occurred with all financial institutions that have been liquidated by the state through the state-run company
Finansiel Stabilitet as part of the bailout of the banking sector. The new regulation thus makes it possible to
publicise accounts of how these banks got into trouble, which has been a political demand from both government
and opposition.

15
represents a marked institutional change and a reorganisation of the relation between the state and
the financial sector. By setting standards for the viability of the business models of financial
institutions, the state has moved closer to the engine room of financial institutions and in the
process much strengthened the role of the FSA in financial regulation. The result is a fencing in of
Danish banks and thus a clearer – and more institutionalised – demarcation of what constitutes
'normal banking business'. Moreover, with the increased focus on openness about the workings of
financial institutions, a previous principle of secrecy has been sidelined by an insistence of making
the problems of financial institutions more public. The significance of the new policies is both
quantitative and qualitative. That is, many of the new laws are quite radical in their own right, but
taking into consideration that they were all implemented within about a year and only two years
after the financial crisis broke out, the Danish case clearly stands out.

Why did Denmark move so fast and so far?

In regulatory terms, the period after the financial crisis has thus far been characterised by a hast to
implement a number of laws that provide the Danish FSA with a much improved possibility of
intervening in financial institutions. Why did policy makers and officials find it necessary to act so
pro-actively and provide the FSA with a significantly strengthened mandate for supervision? There
are three central reasons, all of which are primarily domestically grounded: 1) A changed sentiment
in the political system concerning banking supervision following a number of Danisk banking
crises, 2) organisational change within the Danish FSA, 3) and a divided and weak banking sector 8.

A new sentiment of banking supervision

The Danish experience of the financial crisis played a vital role in creating the impetus for beefing
up the Danish FSA. It was not so much what happened after the fall of Lehmann Brothers – the
international seize up of the interbank money markets – as what happened before the crisis really
took off, namely the bank crises of small- and midsize Danish banks, that helps explain the
radicality of the new laws. The list of banks that became destitute as part of the financial crisis is
long, the most prominent being Roskilde Bank, EBH Bank, Banktrelleborg and Fionia Bank.
Common to these bank crises were issues of mismanagement (intentional – for example price
manipulation in EBH Bank – but mostly due to incompetence), a too lax credit policy, a large
exposure to the building sector and that the FSA had not been able to stop the crises from unfolding.
The most intensely discussed case has been the crisis in Roskilde Bank. The bank received more

8 The following analysis is based on interviews with officials from the Ministry of Economic and Business Affairs,
The National Bank, and the Danish FSA as well as general newspaper coverage.

16
than forty orders from the FSA – primarily to bring down the number of risky projects that the bank
was financing – only to be ignored by the now infamous and retired bank manager, Niels Valentin
Hansen. The Roskilde Bank-crisis was also problematic for the government, because then Minister
of Economic and Business Affairs, Bendt Bendtsen, has been accused of not reacting to warnings
from the FSA that Roskilde Bank was in trouble. Thus, an investigation was initiated in December
2009 to determine how much the ministry and the minister knew about the problems in Roskilde
Bank (Nyholm and Jørgensen, 2009). The FSA has also chosen to bring 15 persons previously
affiliated with the bank (e.g. the director, board members, and an auditor) to trial for breach of
fiduciary trust.
The crises were thus not the result of new, advanced financial instruments. As noted by
director of the FSA, Ulrik Nødgaard, with reference to the bank crises of the 1990s:

“What is depressing about this is that what happened in Denmark in many ways was
exactly the same as the last time: Too high growth in lending, too lax credit control and
too large exposure to the building sector” (Quoted from Aagaard, 2010b).

The period after the financial crisis saw a public debate about how it was possible that no one
stopped the credit craze of the 2000s, which had led to a rise in the total deposit deficit in Danish
banks from DK 131 billion at the end of 2005 to a whopping DK 624 billion just three years later,
which obviously increased the vulnerability of Danish banks to the shock of September 2008. The
main culprits called so far have been the director of the National Bank, Nils Bernstein, for not
sounding the alarm hard and early enough, the banks for their greed and naive belief that the
markets would never turn, the FSA for conducting a weak supervision, and finally the government
for over-heating the economy with ideologically motivated tax credits and a liberalisation of
mortgage credit that fed an already booming housing market.
The many crises in both small, midsize and large banks were decisive in framing the issue in
a way that generated widespread support for reform initiatives (Cox, 2001), or more specifically, a
general political mood was established that the FSA needed to be beefed up by introducing new
laws that enabled a significantly stricter regulatory regime. This appears from both newspaper
coverage of the reform process as well as interviews with public officials. In a retrospective article,
minister of Economics and Business Affairs, Brian Mikkelsen, thus exclaims, referring to the
management of the destitute banks, that

“This is as scandalous as it ever could be. Unimaginably incompetent. That is the lesson

17
 of these cases” (quoted from Aagaard and Hansen, 2010).

In an opinion piece, the opposition leader and Social Democratic chair, Helle Thorning-Schmidt
(2009) called the banks 'irresponsible' and a threat against national prosperity and welfare, arguing
that the lesson is that “When the banks cannot behave themselves – then we must take the
initiative”. She also notes that it would become the banks to show more humility towards the tax
payers, who have saved them from the crisis. In a similar vein, chairman of Finansiel Stabilitet, the
state-run liquidation company that has dismantled destitute banks, Henning Kruse-Petersen, says
that generally he has been shocked by the business models of a lot of the now liquidated banks,
stating that it “it looks like bungling”. After some stalling – with the retiring chair of the DBA
calling the bail-out of Danish banks for 'packages, not presents' – new chair of the DBA and director
of Denmark's largest bank, Danske Bank, Peter Straarup, also found it necessary to admit the
obvious: that Danish banks carried a 'very large part' of the responsibility for the crisis (Svaneborg
and Sandø, 2010).
The widespread political frustration over how the banking sector managed the boom of the
2000s, created the necessary room to usher in a new approach to financial supervision in Denmark.
This is seen, for example, in the case of openness in financial supervision – i.e. publicising
supervision reports – where a marked change of sentiment has occurred. Before the new laws were
implemented, confidentiality in financial affairs was to a much greater degree accepted by the
political system. The previous law on confidentiality in financial supervision was, according to an
FSA senior official, greatly inspired by a report by the law professor, Jan Schans Christensen
(1996):

“The starting point was that supervision is something that goes on behind closed
doors...A change of opinion has occurred since 2008: why should it not be possible to
see the information that the FSA has found important? We have become more open.
That is definitely a change that has happened, which the crisis has probably helped with
– that there should be more openness” (Interview with senior FSA official).

The report by Christensen (1996) states that a supervision that enables the FSA on a regular basis to
publicise the risk situation of financial institutions, would conflict with a fundamental right to
privacy as well as pose a potential threat to financial stability. As noted in the report: “The duty of
confidentiality on part of the FSA is so to speak a key pillar in the chosen legislative construction”
(Christensen, 1996: 20). The new policy of publicising all supervision reports by the FSA obviously

18
is a significant break with this approach. According to the aforementioned senior FSA official, the
new legislation generally constitutes a change of attitude towards financial supervision and
regulation, and a senior official in the Ministry of Economic and Business Affairs judges the new
policy to be “very radical”.
This change of sentiment seems to have occurred most strongly at the political level. At
times the political parties behind the laws thus wanted to go even further than the models
envisioned by the FSA. Again the law about publicising supervision reports is an interesting case in
point. Originally the law was planned to be less radical – bringing the Danish system in line with
the Norwegian and Swedish systems – and so the FSA worked out a less intrusive law, where for
example supervision reports were not subject to mandatory publicising. However, the political
parties behind the law wanted as much openness as possible, and thus insisted that all reports must
be publicised.
The change of sentiment also appears from the new regulation that mandates the FSA to
review the business model of financial institutions. As told by a senior FSA official,

“the opinion has previously been that the FSA must check that the rules are followed,
but they should not have responsibility for the business. It is a change in approach,
when we are supposed to review the business model. That is a political demand”
(Interview with senior FSA official).

A further consideration central to the crafting of new regulation as well as in the clean-up after the
financial crisis, is that powerful actors in the political system, civil service and the large banks
appear to want a 'consolidation' of the Danish banking sector, i.e. fewer banks. Thus, in interviews it
is noted by officials at the FSA and the Ministry of Economic and Business Affairs that the new
regulation will lead to 'less innovation' and put smaller banks under pressure because of the growing
administrative burden. It comes as no surprise that this is not the official agenda of the government,
but newspaper reports have speculated that following the financial crisis, the government has
sought to limit the number of Danish banks. As put by business editor of the Danish paper Politiken,
Niels Lunde (2009a): “When the state's company, Finansiel Stabilitet, stretches a safety net under a
bank in crisis, it is not to save the bank, but rather to put it up for sale”. Because of a city-
countryside cleavage in Danish politics, it is politically controversial to argue that small local banks
should close down, so this intention is not stated officially. The board of the state-run liquidation
company, Finansiel Stabilitet, however, have been very clear that after the tidying up of the banking
sector, “there will be significantly fewer credit institutions...We probably also have way too many”,

19
calling the current number of banks 'grotesque' (Jørn Astrup quoted from Arentoft, 2009). Director
of the National Bank, Nils Bernstein, as well as FSA director, Ulrik Nødgaard, also expect fewer
Danish banks in the future (Arentoft, 2009).
Taken together, then, it was not difficult for the government and opposition to establish a
discourse of crisis (Hay, 2001; Cox, 2001) – the crisis was global in scope and accepted by
everyone, also in Denmark where a number of banking crises had achieved considerable public
attention and spurred public outrage. It is generally acknowledged that the government also played
a role in the crisis by 'overheating' the economy, primarily with untimely tax breaks and a reluctance
to increase property taxes (The Economic Council, 2008; Goul Andersen, 2009), and the crisis
ridden banking sector showed itself as a useful scapegoat (Lunde, 2009b). The crisis thus created a
window of opportunity for the establishing of a new more aggressive supervision of Danish banks.

Organisational change in the FSA

Another important reason for the strengthening of the FSA is a change in management in the FSA,
where the three directors – two vice-director and one director – have been replaced. In 2009 then
finance director (finansdirektør) in The Ministry of Economic and Business Affairs, Ulrik Nødgaard
– who played a central role in the crafting of the two bank packages – was appointed new director
of the FSA. With the change of director a change of approach to supervision also followed. Under
the former director, Henrik Bjerre-Nielsen, supervision was conducted with a close eye to the law,
making sure the FSA did not move out of its judicial bounds. This in turn contrasted the approach of
Eigil Mølgaard, who preceded Henrik Bjerre-Nielsen. According to an FSA official, during
Mølgaard's directorship, the FSA pushed their judicial mandate as far as possible with the aim of
practising aggressive supervision. This led to numerous law suits against the FSA, because without
the necessary judicial mandate, the FSA incurred liability for damages. This was also subject to an
expert group report (Ekspertgruppen, 2004). The more restrained – in the words of a senior official:
risk averse – approach of Henrik Bjerre-Nielsen was thus a reaction to the problems connected to
conducting an aggressive supervision without the necessary judicial mandate. As Henrik Bjerre-
Nielsen puts it in a retrospective interview:

“My starting point was that it was the management – not the FSA – that should run the
banks. The FSA should intervene, if rules were violated” (quoted in Davidsen-Nielsen
and Drachmann, 2010).

The more reactive approach of Henrik Bjerre-Nielsen has been heavily criticised following the

20
unveiling of the impotence of the FSA in handling the Roskilde Bank-crisis. Under the directorship
of Ulrik Nødgaard, the FSA now practices a much more aggressive supervision backed up with a
new judicial mandate.
As part of this process, the FSA seems to have undergone a change of organisational culture.
It has thus been noted in press reports how following the financial crisis the Danish FSA has
changed course moving in a much more energetic and pro-active direction (e.g. Aagaard and
Iversen, 2010; Langsted, 2010; Kjær, 2010). It seems that so far the FSA has taken its new role of
supervision sheriff to heart, which is seen from the increase in police reports and the active use of
the new regulatory instruments. Thus, in a recent high profile case, the FSA used a number of the
new regulations – just a week after their implementation – against the Danish bank, Saxo Bank, that
was suspected of meddling with their sales system – paying too low prices to its clients – and for
not taking necessary measures to avoid money laundering. That the Danish FSA has become more
aggressive and open in its work is also acknowledged by the new director of the Danish FSA, Ulrik
Nødgaard, saying that “We have live ammunition in the belt and we are using it pro-actively” (Kjær,
2010).
Finally, it has also helped the effort to create a more aggressive FSA that after a range of
years of loosing qualified employees to the private sector (interview with senior FSA official), the
budget of the FSA has been boosted with a total of DK 25 million (about 12,5 per cent of total
budget of DK 198 million) leading to the hiring of twenty new employees.

A divided and weak banking sector

How, then, have the Danish banks greeted the new, pro-active approach to financial supervision?
Overall responses have been mixed. On one side the DBA has agreed that new and better regulation
is necessary. As put by director of the association, Jørn Horwitz: “Actually we want regulation...We
are pretty interested not to see a recurrence” (quoted from Iversen and Jelbo, 2010). The DBA has
also demanded that the directors that have mismanaged their banks are prosecuted and fined or
sentenced to jail (Jeppesen and Christensen, 2010). On the other side, the organisation is sceptical
as to the amount of legislation that has been passed, and the association is strongly against Denmark
moving further than countries that Danish banks compete with. In the view of the DBA, new
regulation should be 'international and balanced' to protect the competitiveness of Danish firms. The
association also finds specific laws problematic. A prominent example is the executive order that
requires all supervision reports publicised. According to a joint hearing statement with the
Mortgage Credit Association and the Mortgage Credit Council, the organisations 'strongly
dissociate' themselves from the law proposal, because the law would harm Danish competitiveness

21
and generally was way too extensive.
Considering how comprehensive the regulatory changes have been, though, the Danish
banking sector has been remarkably silent in their critique. There are at least two reasons for this.
First, the financial crisis in Denmark primarily arose due to mismanagement and lax credit policies
that led to an enormous deposit deficit that became impossible to finance after the interbank money
market froze. In other words: the financial crisis left the banks looking bad and also made them
dependent on the help of the political system and tax payers. In such a situation it is difficult to
complain too loudly, and a lot of actors probably could do without too much political attention,
which might in turn make the banks look bad to markets and customers. Second, the banking sector
is internally divided. Generally the large banks want a consolidation of the sector – i.e. buy out their
smaller competitors – whereas smaller banks are fighting for their existence. The difference in
views, though, are only rarely aired publicly, a rare instance being when director of the large bank
FIH proclaimed that the number of banks would half by the start of 2011 (Lunde, 2010). No matter
what the reason for the hesitancy of the Danish banks to publicly criticise the new regulations, the
defensive position of the banks has created a political atmosphere, where there is plenty of room to
introduce new legislation.
It should be noted, though, that the reluctance on part of the banking sector to voice strong
opposition to the new laws, does not mean that the banking sector was not heard in these matters.
As argued by Pedersen (2006a), the Danish economy is structured as a 'negotiated economy' with a
generalized political system of negotiation, meaning that coordination between the political system
and civil society is characterised by “a combination of institutionalized learning and organized
negotiations” (p. 246) with adjustments to international challenges being an everyday feature of the
system. This characterisation of the background on which policy is created corresponds well to the
process behind the crafting of a new supervisory approach in Denmark. As pointed out by a senior
official in The Ministry of Economic and Business Affairs, the banking sector was in many cases
heard – often on a more informal level – in these matters even before the law proposal was
formulated. That the financial sector plays an important role in negotiations over new policy
proposals is also based on the inability of the sector to chose exit as an option on account of the
long history of institutionalized class cooperation in the Danish polity (Pedersen, 2006: 247). Thus,
the radicality of the laws primarily stems from a political frustration and sense of necessity of doing
something, rather than a total disregard of the interests of the banking sector.

Perceptions of competition and vulnerability

What role, then, did considerations of securing the competitiveness of Danish banks in international

22
and European markets play? Generally, officials and politicians focused mostly on how the new
laws would solve the specifically Danish problems and much less on what other countries were
doing. This is not to say that officials did not show interest in the regulatory systems in other
countries. A senior FSA official confirms that the FSA has been in contact with colleagues in
countries like Sweden, Norway and the United Kingdom. Moreover, to mention a concrete example,
the policy of letting financial institutions pay for special external reviews was more or less directly
imported from British financial regulation. However, no comprehensive review of the regulatory
system of other countries was carried through by the FSA. As put by an FSA official:

“The regulation was created on the basis of a strong political wish that the public should
have a better insight to the FSA's investigations of financial institutions. In that context
it was not crucial, what the practice was in the other EU-countries. The FSA has thus
not conducted any greater empirical study of whether similar standards are prescribed in
other EU-countries” (Answer from FSA official to e-mail query by the author, 7 October
2010).

Of course officials and politicians were aware that Denmark is a small country with an open
economy, and that going it alone might hurt competitiveness. As a senior FSA official dryly
remarks: “over in the Ministry of Economic and Business Affairs they are indeed very engaged with
competitiveness” (interview with senior FSA official). However, it was not the interpretation that a
significantly strengthened and more aggressive FSA would hurt Danish competitiveness in the
financial markets. As put by the aforementioned FSA official, the stricter regulation of Danish
banks may rather prove to be an advantage in enhancing the credibility of Danish banks vis á vis
less regulated banking sectors. This line of reasoning is also taken up by the opposition leader Helle
Thorning-Schmidt, who is sceptic of the argument that tighter regulation should necessarily be
international to avoid hurting competitiveness:

“It is a bad excuse – that hides that the banks are hoping that international rules will be
weak and watered down...Of course tighter international rules would be desirable. But it
is unfair that Danish bank clients should continue to be tricked in Danish banks, just
because no international rules are implemented” (Thorning-Schmidt, 2009).

Even if tighter regulation leads to less growth in Danish banks, this is, according to Helle Thorning-
Schmidt (2009), a price worth paying for financial stability. That the new stricter regulation will

23
hurt growth, is exactly what director of the DBA, Jørgen Horwitz, has warned. As already
mentioned, the association has generally been sceptic about the effort to impose stricter regulation
than in other countries. The politicians are right to demand tighter regulation and a stronger FSA,
but according to the DBA, Denmark should still follow international standards.
It should be noted that officials and the government have distinguished sharply between
strengthening the supervisory effort and changing standards about equity, gearing or trading in
complex financial instruments. Concerning the latter set of issues, the government agrees with the
DBA that the regulation of the Danish financial sector should follow EU-standards. As put by the
president of The Financial Services Union, Kent Petersen:

“Due to internationalisation, problems in one financial sector quickly becomes a

problem for other countries. Moreover, national distortion of central regulatory areas
may lead to distortion of competition” (quoted from Mikkelsen, 2010).

As it was mentioned in the introduction to this paper, Denmark has not moved alone in matters of
either bail-out packages or new regulation concerning capital adequacy standards. In case of the
former, the primary reasons were probably that there was no time to craft an original approach and
that the bank packages were inherently international: they aimed directly at sustaining the
credibility of Danish banks in the international markets.
The work on the he bailout of the financial sector was characterised above all by hast. The
work on the state guarantee, bankpackage I, was conducted over a period of roughly two weeks, the
three last days with intense negotiations between the government, opposition and the DBA. What
counted was that the model would solve the immediate liquidity problem in Danish banks – that is:
to regain access to the interbank money market – and that it got the acceptance of government,
opposition and the financial sector. The interpretation was that obviously a small open economy like
the Danish, with the liquidity-troubles that the Danish banks were in, was forced to follow the lead
of other states, and so the guarantee was crafted by basically mimicking other states. Though the
time schedule for the crafting of the second bank package was less rushed, a senior official in the
Ministry of Economic and Business Affairs, who worked intensely with the second package,
provides much the same analysis, describing how officials to a large degree followed what had
already been done internationally. This tendency to trail the pack was only enforced through the
hiring of specialists from the private sector (the investment bank Rothschild), who had worked on
similar solutions in other countries.
Thus, the pattern appears that in certain areas it was perceived possible (and desirable) to

24
move forward and regulate differently than other countries, and in other areas this was not even
considered. The areas where Denmark has followed the lead of other countries are the ones that are
most international in scope: the bail-out packages, that to a large degree were used to signal
credibility to international markets, and the capital standards that are implemented through EU-
directives. However, it would be mistaken to conclude that Denmark has only moved alone in areas
that are unimportant, politically and economically. Indeed, the Danish financial sector has witnessed
a marked change in the sentiment that determines the legitimate demarcation between state and
society: the private managerial right has been significantly reduced to provide the Danish FSA with
greater discretion and better access to the engine room of financial institutions, i.e. critically review
and in effect change the business model of individual financial institutions. The choice to go it alone
was thus not based on the perception that financial supervision was a small, insignificant area of
financial regulation. Rather it was based on the perception that the effort to fence in the banks and
help along a consolidation of the banking sector trumped the consideration of the possible negative
effects on the competitiveness of Danish banks – that moreover were deemed minimal.

Conclusion
The signal claim of Katzenstein's Small States in World Markets was that despite prospering at the
mercy of larger states, small states are – with their ability to create relative consensus among
important societal powers – able to act quite successfully in world markets, oftentimes even
surpassing the big states in economic development. The case of Denmark's regulatory initiatives
following the financial crisis supports the general argument that small states can act relatively
forcefully in world markets, even in a sector as internationalised as the financial. The case analysis
also shows that in the effort to satisfy both domestic and international pressures, economic as well
as political, governments in small states can use a strategy of simultaneously following the lead of
big countries in one policy area, while implementing policies in another areas that answer to more
idiosyncratic problems in the home market. In the Danish case, politicians seized the chance to
strengthen control over the financial sector by assigning remarkably strong instruments to the FSA,
and in this way they profited from the the resource that institutional heterogeneity offers to small
states balancing domestic and international pressures. A strong sense of common knowledge had
been build that a strengthened FSA would not hurt the competitiveness of Danish banks to a degree
that it trumped internal demand for stricter regulation and an ensuing consolidation of the financial
sector, and the Danish case is thus illustrative of the argument that the position of small states is
subject to continual re-interpretation. Taken together, the case of Denmark shows that what happens
around the table, when powerful actors sit down to hammer out responses to international pressure,

25
can amount to more than compliance when actors construct a position that places the Liliput
somewhere between taking the rules of big players and carving out a regulatory niche.
The normative message of the Danish case is one of restrained optimism. On one side many
would probably find it refreshing to see a government reacting forcefully to the problems of a weak
supervision in deregulated markets. Despite the intense public and scholarly debate about reworking
the regulation of the financial sector, radical initiatives have in practice been few and far between.
The Danish case shows that significant reform on a national level is possible without dropping out
of equally important international regulatory initiatives. Policy makers may thus find
encouragement in the fact that it is possible to construct a regulatory regime that answers to national
political problems, while reaping the gains of active participation in international reform efforts.
On the other hand, the case also reveals the limits to going it alone, at least for small, open
economies like the Danish. Though, as argued above, the new laws are in many ways radical, the
fact that Denmark is set to follow international standards in areas like capital adequacy, risk
management, etc. shows that there are indeed limits to just how radical the overall change in the
regulatory regime may be. Even though small states are able to act on their own, a comprehensive
overhaul of financial regulation is not likely to appear. It should also be noted that what makes the
Danish case interesting is exactly that Denmark is alone among its peers in moving forward with
radical reforms, and it remains to be seen if other small (or large) states will follow the 'Danish
model'. Despite these caveats, the Danish case may hopefully come to inspire policy makers
grappling with the task of crafting a post-crisis regulatory regime, both by presenting policy
measures that may in the future prove effective in avoiding a financial crisis of the scope
experienced in Denmark, as well as demonstrating how going it alone may be a viable strategy even
for small states.

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