Danes show euro zone that speed is king in bank wind-ups
* Small Danish team rapidly closed 12 banks during crisis
* Denmark avoided bank runs, major bailouts
* Euro zone also opts for small bank crisis team
* But European Commission can challenge its decisions
* Delays deepen crises, former Danish bank official says
By Ole Mikkelsen and Mia Shanley
COPENHAGEN, Dec 19 (Reuters) - Speed is king when handling a failing bank; Denmark used this strategy during the global financial crisis to close a dozen lenders without any costly state bailouts, and yet the euro zone may not have learnt from the experience.
In Copenhagen, Henning Kruse Petersen and a team of just 5 or 6 staff often worked around the clock and over feverish weekends when banks ran into trouble. Some they gave as little as 48 hours to find investors to fund a rescue or be shut down.
Petersen, the former head of Denmark's state-backed bank resolution unit, said it was vital to avoid lenders suffering lingering death throes in public. "A bank under reconstruction is bleeding, you have to react fast enough so it does not bleed to death," he told Reuters.
In the end, Petersen oversaw the demise of the 12 banks over four years, the largest number of bank failures for a European country, with no run on deposits or major, system-wide convulsions as happened in Spain, Ireland, Cyprus, Greece and Britain.
European finance ministers opted for a similar model in a deal on handling future crises which they sealed in Brussels early on Thursday. However, the new resolution regime for euro zone banks risks allowing financial haemorrhage if disagreement emerges over how and when to shut down a bank.
In principle, five permanent members of a newly-created Single Resolution Board, along with the regulators of the countries affected, can decide to close a failing lender in 24 hours.
But if the European Commission opposes a winding-down then the European Council of Ministers steps in, with representatives from all 18 euro zone member states deciding via a simple majority whether to go ahead.
Cue delays and the potential for panic.
"I struggle to see how a plan this complicated will really work in practice," said Neil Williamson, head of EMEA credit research at Aberdeen Asset Management.
The design and funding of the euro zone's resolution regime have been heavily influenced by German efforts to keep its taxpayers off the hook for future bailouts.
To release large amounts of money, the five executive members of the resolution board plus two thirds of euro zone countries - which have also contributed at least 50 percent of the fund - must vote for this.
Building up the fund up to its full level of around 55 billion euros ($75 billion) will take 10 years. Doubts remain that this will suffice, even though the fund will step in only after banks' shareholders, senior bondholders and large depositors have swallowed losses.
"I don't think 55 billion euros will be enough, for anything other than a one-off bank failure. Anything approaching a systemic crisis will have to be dealt with differently," said Williamson.
A fund of 55 billion euros would represent around 0.22 percent of the current combined balance sheets of the largest euro zone banks. More important will be the ability to impose losses on investors. Banks across the euro zone have 860 billion euros of unsecured bonds outstanding, according to Thomson Reuters data.
"Bail-in" legislation to force losses on investors rather than taxpayers, as under the bailout model used during the crisis, does not come into force until 2016. This means already heavily indebted governments could have to provide yet more money if the European Central Bank exposes capital holes that banks can't finance themselves when the euro zone tests their balance sheets next year.
In Denmark, which lies outside the euro zone, Petersen won the legal right to impose losses on senior bondholders and large depositors in 2011.
He was also able to use guarantees from a state with a triple A credit rating to push through resolutions, which normally involved failed banks being swallowed up by larger lenders without requiring taxpayers' funds.
The dozen banks that went under were also small, representing just 3.7 percent of Denmark's banking industry, which is dominated by Danske Bank.
"In Denmark, society provided the necessary guarantee, and the bill was not sent to the taxpayers but to the financial institutions," he said.
The Danish bank resolution fund, derived from levying local banks, is expected to rise to 8 billion crowns ($1.48 billion) in 2016 from 6 billion currently.
At least Europe has given bondholders plenty of notice that they may be clipped in future.
When Denmark first imposed losses on senior bondholders and large depositors in 2011, this hurt many other Danish lenders' ability to raise funds on the markets.
Since then, Copenhagen has tweaked its framework to give healthy banks more incentives to take over failed lenders, including access to guaranteed funding for a combined group, lessening the potential pressure on senior creditors.
But reflecting the tougher local regime, Danish banks' funding costs are still higher than their Nordic peers'.
Denmark's government has yet to decide whether to join the euro zone's resolution mechanism but most people expect it to stay out.
"I'm afraid that the burden of future banking crisis will be put on the taxpayers and Denmark should therefore say 'No'," said Nikolj Villumsen, a member of parliament for the Red-Green Alliance, which is a junior coalition partner.
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