## EXECUTIVE SUMMARY ## Source details **Canonical URL:** [EXECUTIVE SUMMARY](https://www.imf.org/-/media/files/publications/cr/2020/english/1dnkea2020008.pdf) ## Other formats - [Markdown version](/-/media/files/publications/cr/2020/english/1dnkea2020008.pdf.md) - [Structured JSON version](/-/media/files/publications/cr/2020/english/1dnkea2020008.pdf.json) --- ### Key findings and sector overview - Major reforms since the 2014 FSAP: new legislation for resolution and deposit insurance; a resolution framework for banks and mortgage credit institutions (MCIs); designation of two national resolution authorities; establishment of resolution colleges; changes in governance of the deposit insurance system (DIS); revived cross-border cooperation through the Nordic-Baltic Stability Group (NBSG), including a revised MOU and a joint crisis simulation in 2019. - Resolution track record: - Denmark has a solid track record of resolving institutions without public funding by placing resolution costs on owners and creditors. - Authorities apply resolution powers and tools also to small- and medium-sized banks to avoid inefficient bankruptcy procedures and protect depositors and continuity of services. - Two banks were resolved under the new framework (Appendix 1): both taken over by FSC (gone concern resolution authority); management replaced; activities being wound down by FSC. Resolution costs mainly borne by capital owners and subordinated debt and senior creditor holders through a full bail-in. In one case the DIS contributed to the resolution, insulating insured depositors from losses through a bail-in. - Banking sector characteristics: - Financial sector assets about 630 percent of GDP. - 79 banks and MCIs under Danish jurisdiction. - Seven systemically important financial institutions (SIFIs) or groups designated: Danske Bank A/S group (including Realkredit Danmark an MCI), Nykredit Realkredit A/S (MCI) group (including Nykredit Bank), Jyske Bank A/S group (including Jyske Realkredit an MCI), Nordea Kredit Realkreditaktieselskab (MCI), DLR Kredit A/S (MCI), Sydbank A/S, and Spar Nord Bank A/S. - Largest: Danske Bank Group with assets about 170 percent of GDP. - 59 other banks considered non-systemic amount to around 10 percent of total credit institution assets. ### Institutional framework and governance - Five-institution framework: DN, DFSA, FSC, MIBFA, and MOF. Roles and information-sharing generally well defined; DN, DFSA, MIBFA, and MOF have an MOU. FSC not fully incorporated into system-wide arrangements but attends meetings as a guest regularly. - DN (Danmarks Nationalbank): monetary authority and lender of last resort; may grant ELA to solvent but illiquid institutions against adequate collateral; does not supervise or resolve. - DFSA: going-concern resolution authority; resolution unit separated within capital markets department; prepares financial legislation for MIBFA. - FSC: independent public entity, appointed resolution authority and responsible for the DIS; manages legacy Bank Package I-V activities, the Resolution Fund, and the Guarantee Fund (the DIS); not liable for the funds, which are not independent legal entities; subject to annual audits; since 2008 resolved 17 financial institutions. - Governance concerns and recommended reforms to strengthen operational autonomy of FSC: - FSC Board should execute mandate autonomously; government involvement limited to fiscal support decisions. - Board members should serve terms disconnected from the political cycle and sufficiently long to develop expertise. - Formal dismissal procedure to limit dismissals to certain causes and require statement of reasons. - Prohibit active bankers (members of Boards of Directors or management of financial institutions) from serving on FSC Board to avoid conflicts of interest. - Administrative costs (staff size over 50) are borne by the three funds FSC manages. ### Early intervention and recovery planning - DFSA early intervention powers under the Financial Business Act (FBA), including Section 243a and Section 350 FBA; measures include ordering recovery plan activation, convening shareholders, requiring resignations, restructuring debt, changing organization, up to license withdrawal. - Temporary administration: - DFSA can install a temporary administrator for up to one year (extendable in exceptional circumstances); tool unused to date and not adequately prepared for. - Recommendations: define qualifications for special administrators; prepare and regularly update a roster of pre-approved potential administrators; amend FBA to clarify that cost of special administration is borne by the institution under administration. - Recovery planning: - All banks and MCIs required to maintain recovery plans, subject to proportionality. - Simplified recovery plans allowed for institutions with total assets below DKK 12 billion. - Institutions with total assets below DKK 1 billion not required to provide an annual recovery plan; 17 banks currently exempt from annual recovery plan submission. - SIFIs must report updated recovery plans annually; DFSA submits plans to its Resolution Unit and FSC for comment. - Executive Order no. 724 of 27 May 2015 and EU delegated regulation ((EU) 2016/1075) set expectations and contents. - Further operationalization and resources needed, including manuals for resolution powers and early intervention measures. ### Resolution powers, strategy, and planning - FSC resolution powers aligned with FSB Key Attributes and BRRD; applicable to banks, MCIs, certain investment firms, group parents, branches, and group companies with significant functions. - Resolution toolkit includes removal/replacement of governing bodies; takeover and assumption of shareholder/board powers; appointment of special managers; impose continuity of important services; transfer assets/liabilities/contracts; establish bridge bank; establish asset management vehicle; temporary stay of early termination rights; bail-in creditors; write down or convert capital instruments into equity. - Resolution triggers and decision-making: - FSC may initiate resolution when DFSA has notified FSC that (a) the institution is failing or likely to fail and (b) no reasonable prospect that alternatives will prevent failure within an appropriate timeframe, and FSC assesses (ii) that public interest demands resolution measures. - FSC must choose measures most suitable to preserve public interest (stability, continuity of critical functions, depositor protection, public funds). - Independent valuation foreseen to ensure creditors do not suffer greater losses than in liquidation (NCWOL principle); provisional company valuation preferred for speed, later verified by independent valuation. - Preferred strategy for SIFIs: single point of entry (SPOE) open bank bail-in. All banks subject to MREL. - MREL set at two times the total capital requirement including capital buffer requirements (except for one countercyclical buffer). - MREL took effect for systemic banks on 1 July 2019 and all fulfill it. - Danish approach allows phasing-in period for subordination requirement until 1 January 2022. - Systemic institutions jointly issued non-preferred senior debt amounting to DKR 75 billion at end of April 2019. - Non-residents hold 92 percent of the non-preferred senior debt issued by banks. - Danish banks hold less than 1 percent of the issue. - Rules prevent unsophisticated retail customers from investing in MREL instruments. - Breach of MREL triggers intensified supervision, not automatic resolution. - MCIs: - Exempted from MREL and bail-in application; must comply with a debt buffer requirement of 2 percent of lending. - MCI debt buffer fully phased-in to in 2020 (in 2019, it is 1.8 percent on average). - For groups with MCI and bank, MREL applies only for group’s banking activities; liabilities used for bank MREL cannot simultaneously fulfil MCI capital and debt buffer requirements. - SPOE preferred for groups; MCI supported by parent entity. MCIs not part of a group: recapitalise via conversion of debt buffer and use of a bridge holding MCI. - DFSA requires contractual clauses allowing write-down or conversion of liabilities used to fulfil MCI buffer without bail-in. - Small- and medium-sized institutions: - Preferred strategy similar to SIFIs for continuity reasons; losses absorbed via write down of capital instruments and, if necessary, bail-in; FSC would take control, replace management, transfer ownership to a bridge bank holding owned by FSC, then sell assets or wind down under FSC control (controlled liquidation). - Transfer of whole institution allows banking activities to continue with same license and without renewing collateral registration. - Resolution scheme pre-approved under EU state aid regime for institutions with total assets less than EUR 3 billion; larger institutions subject to case-by-case approval. - Judicial review and safeguards: - FSC actions subject to ex post judicial review; individuals with legitimate legal interest may bring decisions before courts; remedies, if successful, limited to compensation by the Resolution Fund. - Section 11 of the Resolution Act: valuations by FSC cannot be subject to separate judicial review but only reviewed in conjunction with FSC’s implementation of resolution measures. - Parliamentary explanations: whether a lawsuit has suspensory effect is for the court to decide; courts can order a stay in specific cases. - Recommendation to amend legislation to not allow the court to delay or reverse resolution measures taken by a resolution authority acting within its legal powers, in good faith. - Operational preparedness: - Authorities require institutions to deliver crucial resolution data within 12 hours. - Since 2017, annual tests of institutions' ability to deliver required data performed with a sample of three institutions each year; first time in 2019 a SIFI was included; foreseen that one SIFI will be included each year going forward. - Recommendation: DFSA and FSC should accelerate the testing cycle, aiming to test more than one SIFI a year. - FSC should invest more resources in preparing resolution manuals for all tools and further operationalize the full toolkit (including asset separation). - Bail-in operationalization priorities: draft legal documentation; enter into contracts; draft playbooks with central security depositories and stock exchanges to ensure investor identification, cancellation of old shares, delivery of new shares. - Resolution planning timelines: - Fully fledged resolution plans for systemic institutions and groups developed annually by FSC, DFSA’s Resolution Unit, and DN; Steering Committee coordinates collaboration. - Priority "deep dive" areas: operational continuity during resolution; internal MREL; identification of key personnel; continuation of management information systems. - Authorities set 2022 as deadline to finalize outstanding areas and have fully fledged resolution plans in place. - For non-systemic institutions, resolution plans updated generally every two years unless under intensified supervision or larger size. - Resolution strategy and main conclusions summarized in MREL decision sent to each institution. - Resolvability assessments: - Prepared annually for all SIFIs and institutions under intensified supervision; smaller institutions assessed biannually. - 2019 cycle focus areas: critical functions; liquidity in resolution; operational continuity; cross-border communication and coordination. - Identified impediments: lack of internal MREL while being phased in; other challenges to analyse in 2020 include capacity to produce resolution data within 12 hours, continuation of critical functions, operational interconnectedness within bank-MCI groups. - Recommendation: expedite resolution planning for SIFIs, especially groups including both deposit-taking banks and MCIs; further work on potential use of a bridge MCI for mortgage-related continuity. ### Deposit insurance, resolution funding, and liquidity - DGF design and coverage: - Paybox plus system under EU DGSD. - Covers deposits up to approximately DKK 745,000 (equivalent to EUR 100,000) per depositor per bank. - Temporary high coverage options: full amount of pension savings accounts; deposits serving social purposes up to EUR 150,000; deposits from non-commercial real estate transactions up to EUR 10 million. - Membership: all deposit-taking institutions licensed in Denmark compulsory members (footnote: as of 2018, 64 banks licensed in Denmark, five banks from the Faroe Islands and Greenland, and 7 MCIs full members). - Funding and targets: - At end-2018, fund size DKK 8.8 billion (target level 0.8 percent of insured deposits or DKK 4.9 billion); fund stopped raising contributions. - Current size sufficient to fully cover insured deposits of all but the seven biggest banks (on a single basis), excluding temporary high balances. - MCI fund limited to DKK 10 million. - DGF extraordinary and back-up funding options (executable within a day): require extraordinary contributions from members; take loan from other compartments of DGF up to limit; borrow from market; ask for state guarantee from MIBFA with approval of parliament’s Finance Committee; secure state re-lending through FSC. - Investments and liquidity: - By law DGF invested only in low-risk assets; may keep cash with central bank. - Investment policy restricts portfolio manager to Danish government bonds and since 2018 DKK nominated non-callable mortgage bonds; restricts maturities and overall duration; requires papers from at least four issuers and maximum 30 percent of an individual paper. - Portfolio management outsourced; repo arrangements with commercial banks for immediate liquidity. - Recommendation: diversify mortgage bond investment risk by also investing in alternative low-risk assets (e.g., Euro-denominated government bonds of selected EU sovereigns). - Payouts and operational readiness: - DGF reimburses depositors within 7 working days after commencement of bankruptcy proceedings; reimbursement via direct payments or transfer to other bank accounts. - No pay-outs during 2014-19. - Cross-border pay-outs: FSC can use Statens Koncern Betalinger (SKB). - Single Customer View (SCV) requirement: institutions must be able to deliver within 12 hours deposit-base breakdown including SCV; not all banks able to track all temporary high balances. - Recommendation: FSC should oblige banks to expand SCV to include clear identification of all temporary high balances. - Recommendation: measure public awareness levels of DIS regularly to assess effectiveness of public awareness activities. - Resolution Fund (RF): - Contributors: banks, MCIs and investment companies via annual risk-adjusted levy. - Target level: 1 percent of insured deposits (DKK 6.1 billion) to be met by 2024. - End-2018 RF account DKK 2.4 billion. - Investment strategy identical to DGF (low-risk assets). - FSC preapproved EU state aid scheme for institutions with balance sheet below EUR 3 billion allows use of RF without further EU approval; for larger institutions (currently 11 institutions, including seven SIFIs) FSC would need European Commission state-aid approval if fund involved. - Permitted uses: guarantee assets/liabilities or provide loans to institution under resolution, subsidiaries, bridge institution or AMV; purchase assets; capital injections and liquidity to bridge/AMV; pay compensation to shareholders/creditors if NCWOL breached; provide loans to resolution funding arrangements of other countries subject to ministerial approval. - Back-up funding: raise extraordinary contributions (maximum three times annual contribution); borrow from market; take loans from Bank Package I-V (FSC equity). - Footnote: Bank Package I-V activities accounted for DKK 6.8 billion as of end-2018 — sufficient to boost RF to target level. - Through FSC, access to full backstop liquidity arrangement (state re-lending) which could be provided within a day without parliamentary approval; re-lending on market terms and repaid over time with industry contributions to RF. - Official financial support and liquidity in resolution: - Denmark implemented BRRD optional government stabilization tools: state may participate in resolution in extraordinary circumstances when other tools insufficient. - Preconditions: Minister for Industry, Business, and Financial Affairs must assess conditions met and parliament’s Finance Committee must approve; subject to mandatory 8 percent contribution by shareholders and creditors and EU state aid rules. - Exceptional/system-wide support framework not explicitly established; such support discussed within Coordination Committee and subject to parliamentary approval; crisis funding available only as last resort and paid back by industry (e.g., past Bank Packages). - Liquidity assistance options in resolution: - DN may grant ELA to solvent credit institutions with sufficient collateral but not obliged. - Liquidity in resolution could be provided through: access to ELA from DN (with a government guarantee); liquidity from Resolution Fund (with government back-up); government directly. - DN should be able to provide liquidity to enable resolution plans subject to safeguards for a systemic and viable institution whose solvency concerns will be resolved with certainty and within a short time frame. - Choice among options should consider capacity to secure amounts quickly and continuously. ### Contingency planning, crisis management, and cross-border cooperation - Coordination Committee on Financial Stability (since 2005): representatives from MIBFA and MOF (Deputy Minister level), DFSA (Director General) and DN (one of three governors); MOU 2005 governs collaboration; meets at least every six months. - Committee became less active recently; recommendations: - Make FSC an official member of the Coordination Committee and the 2005 MOU. - Prepare and regularly update an overarching national crisis management plan to ensure complementarity across DFSA, DN and FSC. - Prepare a crisis communication plan so agencies speak with “one voice” during crisis. - Use simulation exercises to test and enhance preparedness. - Cross-border cooperation: - Resolution colleges operational since 2016 for Danske Bank, Jyske Bank and Saxo Bank; chaired by DFSA and FSC as group-level resolution authorities with cooperation agreements; DFSA, FSC, DN, MOF and MIBFA engage in colleges as appropriate. - NBSG (Nordic-Baltic Stability Group) revived with new 2018 cross-border cooperation agreement; membership: Denmark, Estonia, Finland, Iceland, Latvia, Lithuania, Norway and Sweden; meets at least annually; tasks include exchange of information, coordination of public statements, organizing financial crisis simulation exercises, and enhancing crisis preparedness. - 2019 NBSG simulation (31 authorities, SRB and EU Commission; ECB observer) main findings: - In absence of internal MREL, SPOE strategy not fully operational. - Issues with funding in resolution. - Timely valuation challenges. - Bank data shortcomings. - Challenges to coordinate resolution actions (bail-in). - Challenges coordinating joint crisis communication. - NBSG follow-up: working group on secure communication channels. - Legal protection for safety-net staff and management: - Staff enjoy legal protection under Danish Act of 1683; employers liable for actions within scope of duties; present and former employees not personally liable for usual, proper exercise of duties; criminal behavior excluded. - FSC Board and management protected through two-tier system; FSC secured insurance up to EUR 90 million with cap on legal representation expenses of EUR 3.35 million; advisors have separate liability insurances; MIBFA waived right to claim damages exceeding insurance if member guilty only of ordinary negligence. - DFSA Board members protected via general governmental self-insurance. ### Appendix I — Selected Danish resolution cases - Two small cooperative banks resolved under the 2015 framework: J.A.K. Slagelse (October 2015) and Københavns Andelskasse (September 2018). Both had total deposits under USD 50 million and were resolved to preserve depositors’ access and payment system continuity. - J.A.K. Slagelse: - Less than 4,000 depositors; total deposits below DKK 250 million (USD 36 million). - FSC replaced management, created bridge bank holding Broinstitut I A/S, wound down activities; provisional valuation led to full write-down of members’, subordinated creditors’ and ordinary unsecured creditors’ claims; DIS contributed to losses instead of protected depositors; Resolution Fund injected new capital after bail-in. - All measures implemented within a day; final valuation confirmed provisional valuation; license handed back in May 2017; remaining assets being managed by FSC. - Københavns Andelskasse: - Around 1,940 depositors; deposits DKK 311 million (around EUR 46 million). - DFSA on-site inspection found significant regulatory breaches and unsustainable business model; FSC applied bail-in, assumed control, transferred ownership to bridge holding Broinstitut II A/S; pre-approved EU state aid scheme applied. - Temporary financial valuation cancelled contributed capital of members; subordinated and unsecured creditors including uninsured and insured depositors above EUR 100,000 had claims written down; Resolution Fund injected new capital; final independent auditor valuation outstanding; banking license revoked in June 2019 after banking activities terminated; remaining assets being wound down by FSC. ### Main recommendations (selection and priorities / timing) - Institutional framework 1. Strengthen the autonomy of FSC by (i) giving members of the Board of Directors and management longer contract terms, (ii) allow their removal from office during their term only for reasons specified ex-ante in law or regulation, (iii) limit the decision power of the MIBFA in resolution to situations when fiscal support is needed (MIBFA; ¶15) — MT H 2. Establish rules for the FSC’s Board of Directors which prohibit “active” bankers, including Board Directors of financial institutions, to join the Board (MIBFA; ¶15) — MT H - Early intervention and recovery planning 3. Operationalize the temporary administration tool by clarifying qualifications as well as establishing a roster of potential candidates and clarify in the FBA that the cost is borne by the institution under administration (DFSA; ¶18) — ST M - Resolution powers and planning 4. Expedite the resolvability of SIFIs by (i) finalizing the priority areas for resolution plans and (ii) accelerating the testing of resolution reporting capabilities (DFSA/FSC; ¶33) — ST H 5. Further operationalize the complete resolution framework, including the bail-in tool, and develop manuals for each resolution power provided by the law (FSC; ¶29) — ST M 6. Amend the legislation to not allow the court to delay or reverse resolution measures taken by a resolution authority acting within its legal powers, in good faith (MIBFA; ¶28) — MT M - Deposit insurance and resolution funding 7. Expand the bank’s Single Customer View to ensure tracking of temporary high balances (FSC; ¶38) — ST H 8. Measure public awareness levels of the DIS regularly to assess the effectiveness of public awareness activities (FSC; ¶39) — C M - Official financial support (including liquidity in resolution) 9. Define strategies for liquidity assistance to institutions in resolution (DN/DFSA/FSC/MIBFA/MOF; ¶46) — ST H - Contingency planning and crisis management 10. Expand the membership of the Coordination Committee on Financial Stability by making FSC a member of the 2005 MOU (DFSA/DN/FSC/MIBFA/MOF; ¶48) — ST M 11. Revive the Coordination Committee on Financial Stability and advance crisis preparedness with (i) a system-wide contingency plan; (ii) a crisis communication plan, and (iii) regular multi-agency financial crisis simulation exercises (DFSA/DN/FSC/MIBFA/MOF; ¶48) — ST H *Timing: C: continuous; I: immediate (<1 year); ST: short term (1–2 years); MT: medium term (3–5 years). Priority: H: High; M: Medium; L: Low.* *Source: 1dnkea2020008* ### EXECUTIVE SUMMARY __________________________________________________________________________ 4 ### EXECUTIVE SUMMARY ### Key findings - Since the 2014 FSAP, Denmark’s financial safety net and crisis management frameworks, including bank resolution, have improved significantly through major reforms: new legislation for resolution and deposit insurance; a resolution framework for banks and mortgage credit institutions (MCIs); designation of two national resolution authorities; establishment of resolution colleges; changes in the governance of the deposit insurance system (DIS); and revived cross-border cooperation through the Nordic-Baltic Stability Group (NBSG), including a revised MOU and a joint crisis simulation in 2019. - Denmark’s financial safety net rests on sound foundations and its resolution strategy for small- and medium-sized banks has been successfully tested in practice. Different authorities work well together and exchange information for resolution purposes. Denmark has a solid track record of resolving institutions without the need of public funding but putting the resolution costs on owners and creditors. Authorities apply resolution powers and tools also to small- and medium-sized banks to avoid inefficient bankruptcy procedures and to protect depositors and continuity of services. - Two banks were resolved under the new framework (Appendix 1). Both banks were taken over by FSC (the gone concern resolution authority), management was replaced, and activities are being wound down by FSC. Resolution costs were mainly borne by capital owners and subordinated debt and senior creditor holders through a full bail-in. In one case the DIS contributed to the resolution, insulating the insured depositors from losses through a bail-in. ### Institutional framework and governance issues - Institutional arrangements: Denmark’s framework comprises five institutions: DN, DFSA, FSC, MIBFA, and MOF. Roles, responsibilities, accountabilities and information sharing arrangements are generally well defined. DN, DFSA, MIBFA, and MOF have an MOU which details information exchange and cooperation for crisis management. FSC is not fully incorporated into these system-wide arrangements but attends meetings as a guest regularly. - DN (Danmarks Nationalbank) is the monetary authority and lender of last resort. DN may grant ELA to institutions that are solvent but face liquidity difficulties against adequate collateral. DN does not exercise supervision or resolution functions. DN is consulted by DFSA on resolution plans for systemic institutions and participates in resolution colleges as an observer. DN is the secretariat for and the governor chairs the Systemic Risk Council. - Governance of resolution authorities, especially the Financial Stability Company (FSC), should be strengthened by enhancing its operational autonomy: - The FSC Board should be able to autonomously execute the FSC’s mandate without interference from the government or industry; the government should be involved in resolution decisions only when fiscal support is needed. - FSC Board members should serve a term disconnected from the political cycle and sufficiently long to develop expertise. - A formal dismissal procedure should foresee that directors and manager can only be dismissed for certain causes and that a statement of reasons is given for their dismissal. - Rules should prohibit active bankers (members of the Board of Directors or management) from serving as FSC Board members to prevent perceived conflicts of interest. ### Systemic firms, recovery and resolution readiness - Denmark’s banking sector characteristics: - The financial sector has assets of about 630 percent of GDP. - There are 79 banks and MCIs under Danish jurisdiction. - Seven systemically important financial institutions (SIFIs) or groups have been designated, including banks and MCIs: Danske Bank A/S group (including Realkredit Danmark an MCI), Nykredit Realkredit A/S (MCI) group (including Nykredit Bank), Jyske Bank A/S group (including Jyske Realkredit an MCI), Nordea Kredit Realkreditaktieselskab (MCI), DLR Kredit A/S (MCI), Sydbank A/S, and Spar Nord Bank A/S. - The largest is the Danske Bank Group with assets of about 170 percent of GDP. - There are 59 other banks considered non-systemic and amount to around 10 percent of total credit institution assets. - Further efforts are needed to ensure operational readiness to rapidly execute recovery and resolution measures for systemic firms. Authorities should: - Accelerate resolution planning for SIFIs, focusing on priority areas such as operational continuity and internal MREL. - Expedite the testing cycle for SIFIs’ capability to deliver crucial resolution data within 12 hours and include more than one systemically important institution per year. - Conduct conceptual work on the potential use of a bridge MCI to ensure continuity of critical mortgage-related functions and on practical execution of the bail-in tool given that the large majority of MREL instruments is held by foreign investors. - Invest more resources in preparing resolution manuals for all resolution tools available and for the use of temporary administration during early intervention. - Consider amending legislation to prevent courts from delaying or reversing resolution measures taken by a resolution authority acting within its legal powers, in good faith (some such changes are partially included in the parliamentary explanations of the Resolution Act). ### Early intervention and recovery planning - Authorities should operationalize the temporary administration tool by clarifying qualifications, establishing a roster of potential candidates, and clarifying in the FBA that the cost is borne by the institution under administration. - Recovery planning work is under way but needs further operationalization and resources, including manuals for resolution powers and early intervention measures. ### Depositor insurance and resolution funding - The DIS has been enhanced since 2014, including shortening the payout timeframe to 7 days. - Authorities should expand the bank’s Single Customer View to ensure tracking of temporary high balances. - Public awareness of the DIS should be measured regularly to assess the effectiveness of public awareness activities. ### Official financial support and liquidity in resolution - The authorities should define strategies for liquidity assistance to institutions in resolution. Without such a facility, the resolution framework is missing an important element. An institution in resolution may need liquidity to ensure continuation of critical functions. The Danish authorities acknowledge the importance of having procedures in place but are following EU discussions while exploring different options internally (liquidity provided through ELA, the Resolution Fund with a government backstop or directly via the government). - DN should be able to provide liquidity to enable resolution plans to be put into effect, subject to safeguards, for an institution which is considered systemic and viable and whose solvency concerns will be resolved with certainty and within a short time frame. - Authorities will need to assess if the Resolution Fund (with back-up funding from the government) is well suited to secure needed amounts within a short period of time and on a continuous basis. ### Contingency planning and crisis management - Aspects of the domestic crisis management framework should be further enhanced: - The Coordination Committee for Financial Stability needs to include the FSC as an important pillar of the financial safety net because FSC is (1) the resolution authority for gone concern institutions, (2) the manager of the Resolution Fund, and (3) responsible for the DIS. - Nationally coordinated contingency planning and crisis preparedness should be advanced under the auspices of the Coordination Committee, including nationally coordinated crisis management and communication plans. - Authorities should test operational readiness with a system-wide financial crisis simulation exercise. - Regional cooperation through the NBSG was recently strengthened. ### Main recommendations (Table 1) - Institutional framework 1. Strengthen the autonomy of FSC by (i) giving members of the Board of Directors and management longer contract terms, (ii) allow their removal from office during their term only for reasons specified ex-ante in law or regulation, (iii) limit the decision power of the MIBFA in resolution to situations when fiscal support is needed (MIBFA; ¶15) — MT H 2. Establish rules for the FSC’s Board of Directors which prohibit “active” bankers, including Board Directors of financial institutions, to join the Board (MIBFA; ¶15) — MT H - Early intervention and recovery planning 3. Operationalize the temporary administration tool by clarifying qualifications as well as establishing a roster of potential candidates and clarify in the FBA that the cost is borne by the institution under administration (DFSA; ¶18) — ST M - Resolution powers and planning 4. Expedite the resolvability of SIFIs by (i) finalizing the priority areas for resolution plans and (ii) accelerating the testing of resolution reporting capabilities (DFSA/FSC; ¶33) — ST H 5. Further operationalize the complete resolution framework, including the bail-in tool, and develop manuals for each resolution power provided by the law (FSC; ¶29) — ST M 6. Amend the legislation to not allow the court to delay or reverse resolution measures taken by a resolution authority acting within its legal powers, in good faith (MIBFA; ¶28) — MT M - Deposit insurance and resolution funding 7. Expand the bank’s Single Customer View to ensure tracking of temporary high balances (FSC; ¶38) — ST H 8. Measure public awareness levels of the DIS regularly to assess the effectiveness of public awareness activities (FSC; ¶39) — C M - Official financial support (including liquidity in resolution) 9. Define strategies for liquidity assistance to institutions in resolution (DN/DFSA/FSC/MIBFA/MOF; ¶46) — ST H - Contingency planning and crisis management 10. Expand the membership of the Coordination Committee on Financial Stability by making FSC a member of the 2005 MOU (DFSA/DN/FSC/MIBFA/MOF; ¶48) — ST M 11. Revive the Coordination Committee on Financial Stability and advance crisis preparedness with (i) a system-wide contingency plan; (ii) a crisis communication plan, and (iii) regular multi-agency financial crisis simulation exercises (DFSA/DN/FSC/MIBFA/MOF; ¶48) — ST H *Timing: C: continuous; I: immediate (<1 year); ST: short term (1–2 years); MT: medium term (3–5 years). **Priority: H: High; M: Medium; L: Low.* *Source: 1dnkea2020008 - EXECUTIVE SUMMARY* ### 8. The Danish Financial Supervisory Authority (DFSA) is both supervisory and resolution ### 8. The Danish Financial Supervisory Authority (DFSA) is both supervisory and resolution authority ### Overview - The overall objective of the DFSA is to ensure financial stability and confidence in financial institutions and markets. - DFSA is responsible to protect the functioning of financial markets and to supervise the banking, insurance, and securities sectors. - DFSA acts as the going concern resolution authority with main responsibilities in recovery and resolution planning and the removal of impediments to resolvability. - DFSA’s resolution unit is part of the capital markets department and therefore separated from the agency’s supervisory functions. - DFSA prepares all new financial legislation for MIBFA and is an agency within the MIBFA. ### Division of resolution responsibilities (Box 1) - The DFSA and FSC share responsibilities for resolution of banks and MCIs as follows: Going concern resolution authority (DFSA) - Is point of contact for institutions in going concern. - Collects relevant information from institutions (e.g. for preparing resolution plans and setting MREL). - Approves the resolution plans (following recommendations from FSC and for systemic institutions in consultation with DN). - Is empowered to issue orders to address or remove impediments to resolvability. - Sets and monitors MREL requirements (after consultation with FSC). - Signs joint decisions on resolution plans and MREL within resolution colleges while the institutions are in going concern. Gone concern resolution authority (FSC) - Is point of contact for institutions in resolution. - Develops the resolution plans (in cooperation with DSFA’s Resolution Unit and—for systemic institutions—DN). - Takes control of the resolution process once an institution is assessed by DFSA’s supervisory authority as failing or likely to fail. - Assesses whether the public interest test is fulfilled which determines if a failing institution is resolved through the resolution framework or liquidated through bankruptcy proceedings. - Is empowered to apply resolution powers and tools. - Signs joint decisions with other resolution authorities while the institution is in resolution. - Coordination and information exchange are regulated by the Cooperation Agreement between DFSA and FSC from August 2019, including quarterly management-level meetings and MOU provisions on information exchange and cooperation in domestic and international matters as well as legal proceedings. ### The Financial Stability Company (FSC) - FSC is an independent public entity, appointed resolution authority and responsible for the deposit insurance system (DIS). - Objectives: contribute to ensuring financial stability in Denmark, manage responsibilities and powers under the Resolution Act, the Deposit Insurance Act and other legislation or tasks assigned by MIBFA. - Established in 2008 as a limited company owned by the Danish government (MIBFA) to resolve failing banks; appointed resolution authority together with DFSA in June 2015 and legal form changed to current status. - Assets and liabilities of the formerly independent DIS were transferred to FSC in 2015. - DIS provides coverage for depositors and investors of all Danish banks, MCIs and investment companies as well as certain investment management funds. - FSC becomes acting resolution authority when the conditions for resolutions are met. - Business areas: legacy Bank Package I-V activities, the Resolution Fund, and the Guarantee Fund (the DIS), with a statutory requirement for separate management of the assets of the individual segments. - FSC is not liable for the Guarantee Fund or the Resolution Fund; the funds are not independent legal entities and FSC acts on their behalf (e.g., when applying for back-up funding from the government). - FSC is subject to annual audits. - Since 2008, FSC has resolved 17 financial institutions and was involved in private-sector solutions which prevented a resolution. - FSC is pursuing several liability lawsuits against the former management of failed banks; FSC sues persons when it believes that it is more than likely that a court will rule in favor of FSC. ### Role of MIBFA and Ministry of Finance (MOF) - MIBFA is responsible for the financial sector and sets the policy framework for crisis management and bank resolution; it approves mergers of banks (powers pursuant to the FBA, mostly delegated to DFSA), issues executive orders, rules, and regulations for implementation of the FBA and other financial sector laws. - MIBFA is the decision-making authority for the countercyclical capital buffer, the SIFI buffer, and the systemic risk buffer, and has overall responsibility for DFSA and FSC. - MOF participates in government and parliamentary procedures on state granted re-lending for the safety net (back-up funding). By law, FSC has access to back-up funding from the MOF in the form of state granted re–lending as a last resort. - MOF drafts Denmark’s budget (the Finance Act) and handles economic policy and macro-economic analysis. ### Governance and operational independence - FSC governance: - Run by a Board of Management (currently with three members) and governed by a Board of Directors (up to seven members). - Management is nominated by the Board of Directors, which is nominated on an annual basis by MIBFA. The minister may dismiss appointed Board members at any time. - Board discusses resolution strategies and resolution plans of individual institutions as well as MREL requirements and would present the minister with recommendations about resolution tools for SIFIs. - Management runs daily business, including resolution of small and medium institutions autonomously and on an arms-length basis from the ministry. - FSC must inform MIBFA of matters with political or economic impact. - Administrative costs (staff size over 50) are borne by the three funds it manages (Bank Packages, Resolution Fund, and DGS). - DFSA operational independence concerns: - Appointments to the Supervisory Board are made by the Minister of MIBFA for two-year durations (re-appointment permitted); a Ministry observer is appointed with speaking but not voting rights. - A dismissal procedure for a board Member does not currently exist. - DFSA is funded through fees charged to supervised institutions but subject to budget approvals by MIBFA and MOF. - For systemically important institutions (SIFIs), the Minister of MIBFA decides on the choice of resolution tools (Section 12 (6) Resolution Act). Resolution strategies are discussed in the Coordination Committee on Financial Stability and cross-border resolution colleges; in an actual resolution case the minister would make decisions based on FSC recommendations and consultation with MOF if back-up funding is needed. - Recommendations to strengthen operational autonomy of the resolution authorities (especially FSC): - FSC’s Board should be able to autonomously execute the authority’s mandate without interference from government or industry; government involvement should be limited to cases where fiscal support is needed. - Board members should serve terms disconnected from the political cycle and sufficiently long to develop pertinent expertise (typically longer than the term of appointing officials). - A formal dismissal procedure should limit dismissal to certain causes and require a statement of reasons. - Governance framework should prohibit active bankers (members of the Board of Directors or management of financial institutions) from serving on FSC Board to avoid conflicts of interest and require full disclosure of conflicts before joining. - Operational autonomy protections should be enshrined in the legal framework. ### Early intervention and recovery planning A. Early Intervention - The Financial Business Act (FBA) gives DFSA early intervention powers when a bank or MCI breaches (or it becomes highly probable that it will breach) legal requirements, among others, capital requirements (Section 243a FBA). - DFSA may order institutions to implement one or more measures within a set time limit, including: - Set in motion or update the recovery plan. - Convene a meeting of shareholders. - Require resignation of one or more members of the Board of Directors or management. - Restructure debt. - Change the business, legal or organizational structure. - Section 350 FBA gives DFSA far reaching powers to take remedial action beyond a defined catalogue (criteria: “the financial position of the undertaking has deteriorated to such a degree that the interests of depositors or bond owners are endangered and there is no insignificant risk that the situation will deteriorate further resulting in the loss of the license”). - Past measures have included restriction of activities, suspension of dividends, and changes of management. - If measures are not implemented within the prescribed time limit, DFSA may withdraw the license. - Decisions by DFSA may be brought before the Danish Company Appeals Board or civil courts (Section 372(1) FBA). - Internal DFSA processes: - DFSA has a business procedure on Early Intervention and Management of Distressed Undertakings (business procedure number 9) and a crisis manual including sanctioning powers, but procedures could offer more concrete guidance on recognizing need for early intervention. - DFSA informs FSC early about institutions facing problems and intensified supervision, breaches of MREL, or when intervention measures are implemented. - FSC may require DFSA to test resolution preparedness of any institution that satisfies terms for early intervention. - Temporary administration - DFSA can install a temporary administrator to replace or assist the Board of Directors; the administrator’s assignment scope is detailed in an order. - Temporary administration can last up to one year and may be extended under exceptional circumstances. - DFSA has not yet used this power and has not adequately prepared for its use; only some aspects (e.g., remuneration) are described in DFSA’s Crisis Management Manual. - Recommendations: - Define in advance qualifications for special administrators. - Prepare and regularly update a list of pre-approved potential administrators meeting qualification criteria. - Amend the FBA to clarify that the cost of special administration is borne by the institution under administration (currently only stated in the official notes to the FBA). B. Recovery Planning - All banks and MCIs under Danish jurisdiction are required to maintain recovery plans, subject to proportionality. - DFSA allows simplified recovery plans for institutions with total assets below DKK 12 billion. - For institutions with total assets below DKK 1 billion, requirements are even simpler: they are not required to provide DFSA with an annual recovery plan and must only update the plan if material changes occur and submit an annual capital raising plan instead. (Currently, 17 banks are not required to submit an annual recovery plan.) - SIFIs must report an updated recovery plan to DFSA every year. Upon receipt, DFSA submits the recovery plan to its Resolution Unit and FSC for comment; significant shortcomings must be remedied by the institution. - Group recovery plans are discussed within cross-border colleges for supervision and resolution. - DFSA has detailed recovery plan requirements in an Executive Order (EO) and a guideline; expectations are well established: - EO lists areas to be addressed, including stress scenarios and appropriate responses. - Danish institutions must fulfill Commission delegated regulation ((EU) 2016/1075) on recovery plan contents. - Plans cover reporting duties for resolution purposes, interconnectedness, and critical systems as input for resolution planning. - Final plans are approved by institutions’ Boards of Directors. - DFSA and industry are in regular dialogue; earlier deficiencies (mainly in smaller banks) have been addressed. - Reference: Executive Order no. 724 of 27 May 2015 about Recovery Plans for Banks, Mortgage-credit institutions and Investment firms (the EO was not shared with the mission). ### Resolution powers and planning A. Resolution powers - FSC has a broad range of bank resolution powers closely aligned with the FSB Key Attributes (Key Attribute 3) and within the EU BRRD framework. The framework applies to Danish banks, MCIs and certain investment firms, group parent companies of a financial group or conglomerates, branches of foreign credit institutions and group companies that carry out significant functions. - FSC can use, separately or in combination, the following resolution powers and tools: - Remove and replace the governing bodies (management and Board of Directors) of the institution or a financial group. - Take control over the institution and assume the powers of shareholders and the Board of Directors. - Appoint a special manager and dismiss the Board of Directors and management. - Impose the continuity of important services on the relevant entities. - Transfer assets, liabilities and contracts to other legal entities or to a bridge bank. - Establish a bridge bank. - Establish an asset management vehicle and transfer assets to it. - Temporarily stay the exercise of early termination rights and suspend payment obligations. - Bail-in creditors of the institution. - Write down or convert relevant capital instruments into equity. *Source: 1dnkea2020008 - 8. The Danish Financial Supervisory Authority (DFSA) is both supervisory and resolution* ### 22. DFSA as supervisory authority is responsible to assess whether or not an institution is ### 22. DFSA as supervisory authority is responsible to assess whether or not an institution is ### Resolution triggers and decision-making - FSC can initiate resolution actions when all of the following conditions are met: - (i) DFSA has notified FSC (a) that the institution is failing or likely to fail and (b) that there is no reasonable prospect that any alternative measures, including by the private sector, would prevent the failure of the institution within an appropriate timeframe, and when in FSC’s view (ii) the public interest demands one or more resolution measures to be taken (instead of initiating bankruptcy proceedings). - FSC must choose the resolution measure(s) most suitable to preserve the public interest, taking into account: stability of the financial system, continuity of critical functions, protection of depositors and public funds. - FSC may diverge from the resolution plan as necessary to achieve resolution objectives. - An independent valuation of assets and liabilities is foreseen to ensure creditors do not suffer greater losses as result of resolution compared to liquidation (NCWOL principle). - FSC’s preferred method due to likely time constraints is a provisional valuation done by the company itself, later verified by an independent valuation. - For this purpose, FSC has contracted audit firms after a public tender. ### Resolution strategy, tools, and MREL - Denmark’s preferred resolution strategy for its SIFIs and other institutions is a single point of entry (SPOE) open bank bail-in. - All banks are subject to MREL to support SPOE. - In resolution: - Capital instruments will be written-down and/or converted. - If necessary, the bail-in tool will be utilized to ensure sufficient loss absorption and recapitalisation. - MREL is set at two times the total capital requirement including capital buffer requirements (except for one countercyclical buffer). - MREL took effect for the systemic banks on 1 July 2019 and all fulfill it.19 - DFSA sets individual MREL for institutions after consulting the FSC and based on the resolution plan. - The Danish approach allows for a phasing-in period for the subordination requirement (full subordination) until 1 January 2022.20 - Systemic institutions jointly issued non-preferred senior debt amounting to DKR 75 billion at end of April 2019. - Non-residents hold 92 percent of the non-preferred senior debt issued by banks. - Danish banks hold less than 1 percent of the issue. - Rules prevent unsophisticated retail customers from investing in MREL instruments. - A breach of MREL requirements is not an automatic entry into resolution but triggers intensified supervision. - Internal MREL policies are under development. ### Resolution approach for small- and medium-sized institutions and bridge/AMV structures - Preferred resolution strategy for small- and medium-sized institutions is similar to SIFIs regarding use of resolution tools because most daily payments are made through electronic transfers and depositors’ access and payment system continuity are public interest considerations. - Under Danish resolution strategy for such institutions: - Losses would be absorbed through write down of relevant capital instruments and, if necessary, a bail-in. - FSC would take control, replace management, transfer ownership to a bridge bank holding owned by FSC, then sell assets or wind-down the institution under FSC’s control (controlled liquidation).21 - The transfer of the whole institution allows banking activities to continue with the same banking license and without renewing the registration of collateral. - FSC prefers not to separate good from bad assets; bad assets are managed via NPL work-outs or selling asset portfolios. - The resolution scheme is pre-approved under the EU state aid regime for institutions with total assets of less than EUR 3 billion.22 Larger institutions are subject to case-by-case approval. ### Mortgage-credit institutions (MCIs) — special rules - MCIs are exempted from MREL requirements and the application of the bail-in tool. - MCIs must comply with a debt buffer requirement of 2 percent of lending to ensure sufficient loss absorption capacity. - The MCI debt buffer will be fully phased-in to in 2020 (in 2019, it is 1.8 percent on average). - For groups consisting of an MCI and a bank, MREL applies only for the group’s banking activities; liabilities and own funds used to fulfil bank MREL cannot simultaneously fulfil capital and debt buffer requirements that apply to MCIs. - For all groups including MCIs, SPOE is the preferred strategy; the MCI will be supported by the parent entity. - For MCIs not part of a group, the resolution strategy is to recapitalise via conversion of the debt buffer and use of a bridge holding MCI. - Although exempted from bail-in, MCIs’ debt buffer can be written-down and converted because DFSA requires liabilities to fulfil the buffer to include contractual clauses allowing write-down or conversion without bail-in.23 - MCIs that are subsidiaries and part of an SPOE-strategy must issue liabilities to the parent company which can be written down. ### Bankruptcy framework and interplay with resolution - If FSC assesses that resolution is not in the public interest, institutions can be subject to bankruptcy proceedings under the Danish Bankruptcy Act. - Bankruptcy is initiated by an application to the local Bankruptcy Court from the bank itself or one of its creditors. - The Bankruptcy Court must notify DFSA and FSC; it cannot commence bankruptcy proceedings if within seven days FSC decides to apply resolution measures instead. - DFSA can revoke the license and submit a bankruptcy petition when a bank becomes insolvent; DFSA’s decision to petition may not be appealed. - After a bankruptcy order, the court appoints one or more trustees after consultation with DFSA to liquidate assets and pay liabilities. - A draft of financial statements and distribution of recoveries is first presented to DFSA for a statement before submission to Bankruptcy Court. - Once trustee is appointed, DFSA is entitled to participate in meetings of the creditor committee and the committee of inspection. ### Bankruptcy framework for MCIs - Resolution powers and tools generally apply to MCIs, but the Mortgage-Credit Act foresees a special bankruptcy framework: - Commencement of bankruptcy proceedings against an MCI does not give rise to any early repayment of the bonds and derivative contracts. - A liquidator will ensure continued performance, to the extent possible, of the MCI’s obligations, with distressed MCIs’ capital centers being wound-up in accordance with the repayment schedule of the underlying mortgage loans. - To facilitate the process, the liquidator may raise additional loans (e.g., issuance of junior covered bonds, secured by the asset pool but subordinated to other bonds), refinance maturing bonds and provide additional collateral. - A mandatory maturity extension of the bonds in case of a failed refinancing seeks to provide a safeguard against severe funding pressures. - There are no practical experiences with the bankruptcy regime for MCIs. - Due to the importance of the mortgage sector, the strategy for MCIs would be to resolve the institution under the resolution framework rather than pursue bankruptcy. ### Judicial review and legal safeguards - FSC exercises resolution powers without any ex-ante court involvement; resolution actions are subject to ex post judicial review. - Individuals with a legitimate legal interest may bring FSC decisions during resolution before the courts; remedies, if successful, are limited to compensation by the Resolution Fund. - Section 11 of the Resolution Act stipulates valuations carried out by FSC cannot be subject to separate judicial review but may be reviewed solely in conjunction with FSC’s implementation of resolution measures. - Parliamentary explanations state whether a lawsuit has a suspensory effect is for the court to decide; courts can order a stay in specific cases according to general procedural legislation.24 - The legislation should be amended to not allow the court to delay or reverse resolution measures taken by a resolution authority acting within its legal powers, in good faith.25 ### Operational preparedness, manuals, and operationalization of tools - FSC should invest more resources in preparing resolution manuals for all resolution tools and further operationalize resolution tools. - FSC has manuals for tools used in its preferred resolution strategy, but manuals for tools not foreseen (e.g., asset separation tool) are not prepared. - FSC should conceptually plan to utilize the full toolkit, including alternatives to transferring the full bank under the holding structure (e.g., transferring only performing assets into a bad bank). - The complex bail-in tool requires more attention; preparatory steps include: - Drafting necessary legal documentation. - Entering into contracts. - Drafting playbooks with central security depositories and stock exchanges to ensure identification of investors with bail-in-able bonds, cancellation of old shares, and delivery of new shares into accounts. - FSC has identified operationalizing the bail-in mechanism as a priority. ### Resolution planning, testing, and timelines - Fully fledged resolution plans for systemic institutions and groups are developed annually in close cooperation between FSC, DFSA’s Resolution Unit, and DN.26 - A Steering Committee with high-level participants from all three organizations coordinates collaboration, discusses resolution plans (including input from resolution colleges), identifies obstacles, and monitors progress. - Priority areas for resolution planning (“deep dives”) include: Operational continuity during resolution; internal MREL; identification of key personnel; continuation of management information systems. - The authorities set 2022 as a deadline to finalize outstanding areas and to have fully fledged resolution plans in place. - Procedure: FSC prepares plans and presents them to DFSA for approval. DFSA must officially consult DN on resolution plans for Danish SIFIs. DFSA receives all relevant information from institutions and shares it with FSC and DN.27 - Institutions must report data as input for resolution plans; authorities provide feedback on data quality; institutions receive a short summary of the plan once approved by DFSA.28 - For non-systemic institutions, resolution plans are updated less frequently (generally every two years) unless under intensified supervision or of more significant size. - The resolution strategy and main conclusions from the resolution plan are summarized in the MREL decision sent to each institution. ### Data reporting and testing - Authorities require institutions to develop the capacity to provide financial statements and other relevant data within 12 hours of the request. - DFSA has specified in an EO29 which information institutions must deliver for resolution during an actual resolution situation. - Institutions are required to maintain management information systems and procedures to provide FSC with required financial statements including assets, debt and other liabilities, a breakdown of deposits for deposit insurance purposes and other necessary information for valuation purposes. - A system must be in place that allows for a write down of uninsured deposits as part of a resolution. - FSC can ask an institution as early as when it meets the conditions for early intervention to provide the specified data. - Compliance with resolution preparedness requirements is part of DFSA’s supervisory process and subject to testing by FSC. - Since 2017, FSC and DFSA have performed annual tests of institutions' ability to deliver relevant data in compliance with the EO. - Tests are performed with a sample of three institutions each year. - For the first time in 2019, a SIFI was included in the sample; going forward, it is foreseen that one SIFI would be included in the samples each year. - Recommendation: DFSA and FSC should accelerate the testing cycle, aiming to test more than one SIFI a year, given the importance of timely and accurate data. ### Resolvability assessments - Resolution authorities prepare annually resolvability assessments for all SIFIs and institutions under intensified supervision; smaller institutions are assessed biannually. - Assessments are proportionate and the authorities prioritize particular areas each year. - For the 2019 cycle, focus areas included: critical functions, liquidity in resolution, operational continuity and cross-border communication and coordination. - Authorities have identified lack of internal MREL as an impediment to resolvability as it is currently being phased in. - Other potential challenges to analyse in more detail in 2020: - Inability of SIFIs to generate pertinent resolution data within 12 hours. - Continuation of critical functions. - Operational interconnectedness within a bank-MCI group. - The FBA gives DFSA powers to address or remove impediments to resolvability; authorities have not identified significant impediments so far and DFSA did not have to use the powers in the past. - Recommendation: Resolution planning for SIFIs needs to be accelerated and work on priority areas should be expediated, especially for groups including both deposit-taking banks and MCIs due to operational connectivity challenges. - More work is needed regarding potential use of a bridge MCI to ensure continuity of critical mortgage-related functions, including servicing mortgages and maintaining hedging and swap arrangements. *Source: 1dnkea2020008 - 22. DFSA as supervisory authority is responsible to assess whether or not an institution is* ### 35. The Danish DIS, the Deposit Guarantee Fund (DGF), is set up within the framework ### The Danish DIS — Deposit Guarantee Fund (DGF) ### Design and coverage of the DGF - The Danish DIS, the Deposit Guarantee Fund (DGF), is set up within the framework prescribed by the EU DGSD in the form of a paybox plus system. - Coverage: - Covers deposits up to an amount of approximately DKK 745,000 (equivalent to the EU wide harmonized level of EUR 100,000) per depositor and per bank. - When calculating the coverage amount, the DIS applies set-off of insured deposits with liabilities due to the failed institution. - Insured depositors: natural and legal persons, excluding financial institutions and other sophisticated depositors such as insurance companies, public authorities and pension funds. - Temporary high coverage options used by the Danish lawmaker under DGSD: - Full amount of pension savings accounts; - Deposits that serve social purposes for up to EUR 150,000; - Deposits resulting from (non-commercial) real estate transactions up to EUR 10 million. - As a result of additional coverage, some branches of foreign banks of EU and EEA countries in Denmark have applied for supplementary coverage under the Danish scheme (“topping up”). - Membership: - All deposit taking institutions licensed in Denmark are compulsory members. - Footnote data: As of 2018, there are 64 banks licensed in Denmark, five banks from the Faroe Islands and Greenland as well as 7 MCIs being full members of the DIS. ### Funding and backstops of the DGF - Fund size and target: - At end-2018, the fund had a size of DKK 8.8 billion (with a target level of 0.8 percent of insured deposits or DKK 4.9 billion) and the fund therefore has stopped raising contributions. - The current size is sufficient to cover fully the insured deposits of all but the seven biggest banks (on a single basis), but without taking into account the liabilities towards temporary high balances. - The MCI fund is limited to DKK 10 million. - Extraordinary and back-up funding options (can be executed within a day): - Require extraordinary contributions from its members. - Take a loan from other compartments of the DGF up to a certain limit. - Borrow from the market. - Ask for a state guarantee from MIBFA with approval of the parliament’s Finance Committee. - Secure state re-lending through FSC. - Stress testing and reporting: - The DGF is performing stress tests which include pay-outs scenarios, funding, and cross-borders issues. - It is required to publish an annual report. ### Investment and liquidity management - Investment rules: - By law, the DGF can only be invested in low-risk assets. - The fund can keep cash with the central bank. - Investment policy (approved annually by the FSC’s Board of Directors) restricts the portfolio manager to invest only in Danish government bonds and since 2018 DKK nominated non-callable mortgage bonds. - Further risk management: restrict maturities and overall duration, hold papers from at least four different issuers with a maximum of 30 percent of an individual paper. - Portfolio management is outsourced to an external manager who makes investment decisions based on restrictions derived from the investment policy. - Repo arrangements with commercial banks are in place to ensure immediate liquidity needs can be met. - The Guarantee Fund should diversify potential risks stemming from its investment in mortgage bonds by also investing in alternative assets which are low risk (e.g., Euro-denominated government bonds of selected EU sovereigns). ### Payouts, Single Customer View (SCV), and public awareness - Payout arrangements: - The DGF has arrangements in place to reimburse depositors within 7 working days after commencement of bankruptcy proceedings. - Reimbursement mechanisms: direct payments or transfer of deposits to accounts with other banks. - No pay-outs have been made during the period 2014-19. - For cross-border pay-outs, FSC can use the state's collective payments system (Statens Koncern Betalinger, SKB). - Information requirements and SCV: - For resolution, institutions must be able to deliver within 12 hours information on the deposit base, including a break-down of the individual types of the insured deposits (SCV). Fulfilment of this obligation is part of the annual audit. - Currently not all banks are able to track down and report to FSC all types of temporary high balances (which can include large amounts when it comes to full coverage of pension savings accounts). - Recommendation: FSC should oblige banks to expand their SCV to include the clear identification of all temporary high balances. - Public awareness: - Depositors are informed about the DIS when opening a deposit account and annually by their bank. - FSC informs via its webpage and has established a hotline for depositors. - Recommendation: Public awareness levels of the DIS should be regularly assessed to ensure broad understanding, especially given the complexity of temporary high balances and the Danish resolution strategy which aims at preventing a payout. ### Resolution funding and interaction with bail-in - DGF role in resolution: - The DGF cannot directly be used to fund resolution measures but might support the use of the bail-in tool. - The DGF will pay an amount corresponding to the amount by which insured deposits would have been written down if they would have been part of the measure and not excluded from a bail-in by law. - Contribution subject to a least-cost test; the DIS would benefit from the NCWOL-principle and therefore receive compensation from the Resolution Fund if final valuation determines greater losses than in bankruptcy. - The DIS enjoys super preference in the creditor hierarchy after being subrogated to the claims of insured depositors; in bankruptcy proceedings, claims from the DGF are paid immediately after duties and costs of the bankruptcy proceedings. - Resolution Fund (RF) structure and targets: - Contributors: Banks, MCIs and investment companies operating in Denmark contribute through an annual levy which is risk-adjusted for large institutions. - Target level: 1 percent of insured deposits (or DKK 6.1 billion) to be met by 2024. - As of end 2018, the Resolution Fund accounted for DKK 2.4 billion. - Investment strategy for the Resolution Fund is identical to the one for the DGF (low-risk assets). - FSC has a preapproved EU state aid scheme for financial institutions with a balance sheet below Euro 3 billion and can therefore use funds from the Resolution Fund without further approval from the EU. - For resolution of larger institutions (currently 11 institutions, including the seven SIFIs), FSC would need state-aid approval from the European Commission if the fund is involved. - Permitted uses of the Resolution Fund: - Guarantee the assets and liabilities of or provide loans to institutions under resolution, its subsidiaries, a bridge institution or an asset management vehicle. - Purchase assets of the institution under resolution. - Make capital injections and provide liquidity to a bridge institution and an asset management vehicle set up for resolution purposes. - Pay compensation to shareholders or creditors if the NCWOL-principle has been breached. - Provide loans to the resolution funding arrangements of other countries, subject to ministerial approval. - Back-up funding for the Resolution Fund: - Raise extraordinary contributions (maximum of three times the annual contribution). - Borrow from the market. - Take loans from Bank Package I-V (FSC equity). - Footnote: As of end of 2018, the Bank Package I-V activities accounted for DKK 6.8 billion which would be sufficient to boost the size of the Resolution Fund to its target level. - Subject to ministerial approval, borrow from other EU resolution funding arrangements. - Through the FSC, access to a full backstop liquidity arrangement (state re-lending) which could be provided within a day without parliamentary approval; re-lending would be on market terms and paid back over time with the industry’s contributions to the Resolution Fund. ### Official financial support and liquidity in resolution - Government stabilization tool: - Denmark has implemented in its law the BRRD’s optional government stabilization tools. - In extraordinary circumstances the state may participate in resolution when other resolution tools would not suffice to avoid significant adverse effects on financial stability or the public interest. - The tool allows the government to provide capital contributions or to temporarily acquire the institution through a company established by FSC. - Preconditions: Minister for Industry, Business, and Financial Affairs must assess conditions are met and parliament’s Finance Committee must approve. Use is subject to the mandatory 8 percent contribution to loss absorption by shareholders and creditors and to EU state aid rules. - Exceptional/system-wide support: - The framework does not explicitly establish arrangements for exceptional financial or system-wide support. Such support would be discussed within the Coordination Committee on Financial and be subject to final approval by the Danish Parliament. - Crisis funding would be available only as a last resort and on the condition that it is paid back by the industry (as exercised during the last financial crisis through the Bank Packages). - Liquidity assistance in resolution — issues and options: - DN may—but is not obliged to—grant emergency liquidity assistance (ELA) to solvent credit institutions (banks and MCIs) that have a temporary need for liquidity and that are no longer able to refinance their operations on the market and have sufficient collateral. - A central bank should be able to provide liquidity, subject to safeguards, to an institution considered systemic and viable and whose solvency concerns will be resolved with certainty in the context of a realistic, time-bound resolution plan. - Under BRRD, resolution planning cannot assume that ELA will be available, but in actual resolution it cannot be ruled out that bailed-in entities may need significant liquidity. - In Denmark liquidity in resolution could be provided through: - Access to ELA from DN (with a government guarantee); - Liquidity—through lending or guarantees—from the Resolution Fund (with back-up funding from the government); - Government directly. - Choice among options should consider which is better suited to secure needed amounts within a short period and on a continuous basis. ### Contingency planning, crisis management, and cross-border cooperation - Coordination Committee on Financial Stability: - Exists since 2005; consists of representatives from MIBFA and MOF (both Deputy Minister level), DFSA (Director General) and DN (one of the three governors). MOU from 2005 governs collaboration. - It meets at least every six months and otherwise as required. - In recent past the Committee has become less active; it discussed BRRD transposition and MREL requirements and had a subcommittee analyzing participation in the EU Banking Union (finalized analysis and published a report in December 2019). - Recommendations to enhance coordination: - Enhance the role of the Coordination Committee by making FSC an official member and engaging in systemwide contingency planning and crisis preparedness. - Prepare and regularly update an overarching national crisis management plan by the Coordination Committee to ensure complementarity of individual contingency plans and business continuity efforts across DFSA, DN and FSC. - Prepare a crisis communication plan so agencies speak with “one voice” during crisis. - Use simulation exercises (already foreseen under the MOU) to test and enhance the plan. - Cross-border arrangements: - Since 2016, resolution colleges are in place and operational for three banks: Danske Bank, Jyske Bank and Saxo Bank. Chaired by DFSA and FSC as group-level resolution authorities, colleges involve relevant host authorities and have cooperation agreements. - Authorities participate in Swedish resolution colleges (including SEB and Handelsbanken) and SRB resolution colleges for Nordea and BNP Parisbas. DN, MOF and MIBFA participate in some colleges as observers. FSC participates in the Swedbank resolution college in its capacity as DGS authority. - Resolution colleges discuss group recovery plans and group resolvability and sign joint decisions on resolution plans and MREL. - Authorities are permitted and able to exchange pertinent information within the colleges and on a bilateral basis; meetings occur during the year on both terms. *Source: IMF mission notes (content unit: 1dnkea2020008).* ### 50. Nordic and Baltic authorities have revived the Nordic Baltic Stability Group (NBSG) ### 50. Nordic and Baltic authorities have revived the Nordic Baltic Stability Group (NBSG) ### NBSG formation, mandate, and membership - A new cross-border cooperation agreement was signed in 2018, enhancing the earlier 2010 MOU. - Original membership (central banks, relevant ministries, and supervisors) was expanded to include newly formed resolution authorities. - The complete Danish safety net participates in the NBSG. - Signatories/participants are the following jurisdictions: Denmark, Estonia, Finland, Iceland, Latvia, Lithuania, Norway and Sweden. - Objective of the MOU: to facilitate cooperation and coordination in dealing with a cross-border systemic crisis in order to promote financial stability in the region. - Meeting frequency and participation: - The NBSG meets regularly, at least annually, but can meet more often under extraordinary circumstances. - Relevant authorities from the EU (ECB and SRB, for example) can be invited as guests. - Tasks of the NBSG include: - Exchange of information (especially during times of market turbulence). - Coordination of public statements. - Organization of regular financial crisis simulation exercises. - Enhancement of crisis preparedness. - A separate MOU between the central banks of the region from 2016 established procedures for cooperation in granting ELA to a cross-border group. ### 2019 Nordic-Baltic financial crisis simulation — design and key lessons - Exercise participants: 31 authorities from the region, the SRB and the EU Commission (with the ECB as an observer). - Purpose: tested authorities’ crisis management capabilities, regional cooperation and crisis communication. - Main findings from the simulation: - In the absence of internal MREL, the SPOE strategy is not fully operational. - Issues identified with funding in resolution. - Timely valuation challenges. - Bank data shortcomings. - Challenges to coordinate resolution actions (bail-in). - Challenges coordinating a joint crisis communication. - Utility: - The exercise was seen as extremely helpful by all Danish authorities and helped assess internal coordination in Denmark, especially because a large (fictitious) Danish bank was part of the simulation. - Follow-up: - The NBSG set up a working group on (secure) communication channels to be used during a crisis. ### Cross-border cooperation and recognition of resolution actions - The legal framework facilitates DFSA and FSC to cooperate broadly with foreign resolution authorities. - The FSC will take the other countries' interest into consideration when dealing with a Danish cross-border institution. - When a foreign resolution authority applies resolution actions against an institution, an entity or a branch, the FSC will, to the extent necessary: - Provide assistance by ensuring write-downs, conversions or the transfer of instruments of ownership or assets, rights or liabilities located in Denmark. - Assess whether the resolution proceedings of the foreign resolution authority can be recognized and enforced. - Such recognition and enforcement will be coordinated in the resolution colleges. - Note: The group resolution plan for Saxo Bank is in the process of being updated due to a recent material change in the group structure. ### Legal protection for safety net staff and management - Staff protection: - Staff of the safety net authorities enjoy sufficient legal protection under the Danish Act of 1683. - Only the employer (public or private) is liable for actions taken by management and staff when discharging their duties as long as these actions are within the scope of those duties. - Present and former employees are not personally liable for the actions made in the usual and proper exercise of their duties and functions. - Only behavior which is outside the function (e.g. criminal behavior) would allow directly suing a staff member; courts would automatically dismiss legal claims against employees in other cases. - Protection for management and Boards: - Current and former members of management and the Board of Directors of the FSC are protected through a two-tier system. - FSC has secured insurance for the Board and management with regard to both legal representation and liabilities. - The insurance currently covers up to EUR 90 million with a cap on legal representation expenses of EUR 3.35 million. - Advisors have separate liability insurances that vary in coverage. - The MIBFA has waived any right to claim damages, including a right of recourse from the members of Board and management for damages which exceed the insurance coverage, if the member is only guilty of ordinary negligence. - Members of the Board of Directors of DFSA are protected through the general governmental self-insurance for their duties carried out for DFSA. ### Appendix I — Danish resolution cases: J.A.K. Slagelse and Københavns Andelskasse - Context: - The FSC has twice used its revised resolution power and tools and tested the new resolution framework from 2015. - Both resolutions were small cooperative banks with total deposits under USD 50 million and were wound down after passing the public interest test (required under Art. 32 (5) BRRD). - Resolution was preferred to bankruptcy to preserve depositors' access and the payment system. - J.A.K. Slagelse (October 2015) - DFSA determined the bank was failing or likely to fail because of a lack of capital after recovery measures were unsuccessful. - The cooperative had less than 4,000 depositors with total deposits below DKK 250 million (USD 36 million). - Resolution measures implemented by FSC: - Exercised control over the bank and replaced its Board of Directors and management with its own staff. - Created a new subsidiary in the form of a bridge bank holding, Broinstitut (“bridge institution”) I A/S, which assumed ownership of the cooperative. - The bank remained open to the public and services were not interrupted; FSC undertook steps to wind down activities. - State aid and valuation: - Since the cooperative had total assets of less than EUR 3 billion, its resolution was pre-approved under the EU state aid regime and the EU Commission only needed to be informed by FSC. - Based on provisional valuation done by FSC and before transfer to the bridge, all cooperative members’, subordinated creditors’ and ordinary unsecured creditors’ claims were written down entirely. - The Danish DIS contributed to the losses instead of protected depositors (protected depositors are generally excluded from a bail-in). - New capital from the Resolution Fund was injected after the bail-in. - All resolution measures were implemented within a day (takeover of management, set-up of bridge bank holding and execution of bail-in). - The mandatory ex-post valuation confirmed the provisional valuation and FSC declared the interim haircuts as final. - Subsequent steps: - FSC concentrated on winding down activities requiring a banking license first, then handed back the license in May 2017. - An open bidding process for a sale of the full institution was unsuccessfully undertaken in 2016. - FSC is currently dealing with the remaining assets of the failed institution. - Københavns Andelskasse (September 2018) - DFSA determined the cooperative was failing or likely to fail based on an on-site inspection that revealed a significant breach of financial regulation and an unsustainable business model. - At the point of failure, the cooperative had around 1,940 depositors with deposits in the amount of DKK 311 million (around EUR 46 million). - Resolution strategy and measures: - Conditions for resolution were seen as fulfilled on the same grounds as with J.A.K. Slagelse (public’s interest in continuity of deposit and payment functions). - Strategy followed the agreed approach: bail-in, assuming control of management, transferring ownership of the institution under a new subsidiary in the form of a bridge bank holding, Broinstitut II A/S. - The resolution was covered under the pre-approved EU state aid scheme. - Valuation and outcomes: - FSC made a temporary financial valuation to determine the amount of losses. - On the basis of this valuation, the contributed capital of members was cancelled. - Subordinated creditors and unsecured creditors, including uninsured depositors and insured depositors with deposits above the deposit insurance level (EUR 100.000), saw their claims written down (bail-in). - After the resolution the bridge bank holding became the only member of the cooperative. - New capital was injected after the bail-in from the Resolution Fund. - The final valuation by an independent auditor is still outstanding, which will enable FSC to finalize the provisional write-downs. - The banking license was revoked in June 2019 after banking activities requiring a licence had been terminated. - Remaining assets are being wound down by FSC (for example, sale of loan portfolios or internal work out) in a controlled liquidation. *Source: 1dnkea2020008 - 50.* --- _Source: https://www.imf.org/-/media/files/publications/cr/2020/english/1dnkea2020008.pdf_