COPENHAGEN (Reuters) - Denmark has bolstered defenses against shocks to its financial system after a risk-assessment body said the sector's stability could be threatened by the Danske Bank DANSKE.CO money laundering scandal.

The Danske Bank logo is seen in Copenhagen, Denmark September 25, 2018. Ritzau Scanpix/Mads Claus Rasmussen via REUTERS

Danske Bank’s CEO resigned last week after an inquiry revealed that 200 billion euros ($235 billion) of payments had been moved through its Estonian branch over a period of eight years, many of which the bank said were suspicious.

The case is a risk for Denmark’s entire financial sector, the Systemic Risk Council, which monitors threats to the stability of the country’s financial system, said on Tuesday.

It advised the government to double the cash cushion financial firms must hold to protect against economic shocks, to 1 percent of risk-weighted exposure, partly because of the Danske Bank case and partly because of increasing risks in banks’ overall lending.

“The Danish financial system is highly affected by developments and risk perception in international markets. That is why the Danske Bank money laundering case poses a risk to the entire sector and to Denmark’s international reputation,” the council said.

The warning was heeded by the Government, which raised the buffer to 1 percent with effect from Sept. 30, 2019, giving the banks a year to meet a requirement that the Systemic Risk Council says adds 7 billion crowns ($1.1 billion) to their existing regulatory equity requirements.

The “vast majority” of banks will be able to comply with the new requirement, given the sector’s excess capital adequacy was 129 billion crowns in mid-2018, the council said.

Business minister Rasmus Jarlov, meanwhile, said that Denmark’s Financial Services Authority (FSA) could have been more critical in its examination of Danske Bank.

“I don’t understand that the authorities in Denmark and in Estonia have not reacted stronger to the many warnings that there have been,” Jarlov told an open parliament committee meeting on Tuesday.

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He said that the FSA’s reopened investigation of the case would look at whether the bank could be held responsible for having given wrong information to the regulator and that he is ready to assign the resources necessary to get to the bottom of the case.

GRAPHIC: Danske Bank credibility falls - reut.rs/2xB4RiX

PARLIAMENTARY HEARING

The bank’s management was on Tuesday invited by parliament’s business committee to explain its actions to an open hearing.

Under Danish law no one is obliged to participate in public hearings or comment under oath at them. The bank has yet to decide whether it will participate, a spokesman said.

The money laundering scandal has also hit Danske Bank’s credibility among Danes, figures from polling firm Voxmeter showed on Tuesday.

The percentage of Danes who find the bank credible fell to 46 percent last week, by far the lowest level since recordings began in 2008 and much lower than peers Jyske Bank JYSK.CO and Nordea NDA.ST at 80 percent and 64 percent respectively, Voxmeter said.

Its figures suggest that the bank’s image crisis is worse than after the 2008 financial crisis, when the Danish government had to give a guarantee to the bank’s dollar creditors when international loan markets froze.

“This new case is being seen as a breach of trust by customers, and trust is a strong driver for a bank’s business,” said Voxmeter CEO Christian Stjer.

Weakening investor confidence in the bank could hurt its credit rating, DBRS said on Tuesday, while Fitch lowered the outlook for the bank’s ‘A’ credit rating to negative from stable to reflect the potential impact of the scandal.

GRAPHIC: Nordic banks by market value - reut.rs/2xAmjEi

($1 = 0.8503 euros)

($1 = 6.3278 Danish crowns)