DANSKE BANK A/S It would be the first non-euro zone country to submit its banking sector to European Central Bank supervision, a move which would protect its banks on the one hand but also require it to adhere to regulations formulated away from Copenhagen.
A report from the justice ministry also issued on Thursday said joining the banking union would not entail giving up sovereignty, meaning Denmark could go ahead without a referendum, a vote that could have been hijacked by a surging Eurosceptic party.
"Denmark wants to become a member of the banking union, when certain Danish conditions have been met. We have received positive signals from the EU Commission that Denmark from now on can take part in negotiations (about joining)," Economy Minister Morten Ostergaard told Reuters after the reports were issued.
One of the main conditions for Denmark is for the European Commission to rule that mortgage-backed bonds could count as a highly liquid asset that banks could use as a buffer against market shocks without aid.
The European Commission said last year it considered the Danish mortgage-backed bonds, a market that is the second largest in the EU, to fit the category but a final decision is yet to come.
The government's positive report comes months after the central bank urged Denmark to join as soon as possible so as to be able to influence regulation which is still being fine-tuned.
The decision to join will have to be turned over to parliament - most likely after the summer recess and after an election which the centre-right Liberals are likely to win. They said on Thursday they support the idea.
The two largest banks operating in Denmark - Danske (>> Danske Bank A/S) and Nordea (>> Nordea Bank AB) - are keen to join but third largest Jyske (>> Jyske Bank A/S) is somewhat reluctant.
In handing supervision of its banks to Frankfurt, Denmark would lose much of its autonomy in controlling and shaping its financial system.
The ECB has looked into the accounts of the banks that it monitors, often forcing them to take steps to bolster their finances. This influence is resented in some countries, such as Italy, where banks fared particularly badly in health checks late last year.
In some instances, ECB supervision has changed the strategic direction of a bank. Earlier this week, sources told Reuters that a radical plan for Deutsche Bank to become a pure investment bank and corporate lender was ditched after stress tests demanded by the ECB concluded that the model would not withstand a severe financial crisis.
(Additional reporting by John O'Donnel in Frankfurt; writing by Sabina Zawadzki Editing by Jeremy Gaunt)
By Erik Matzen and Alexander Tange
