## _cr14351 ## Source details **Canonical URL:** [_cr14351](https://www.imf.org/-/media/websites/imf/imported-full-text-pdf/external/pubs/ft/scr/2014/_cr14351.pdf) ## Other formats - [Markdown version](/-/media/websites/imf/imported-full-text-pdf/external/pubs/ft/scr/2014/_cr14351.pdf.md) - [Structured JSON version](/-/media/websites/imf/imported-full-text-pdf/external/pubs/ft/scr/2014/_cr14351.pdf.json) --- ### EXECUTIVE SUMMARY — scope and method - Elaborates on findings and recommendations from the Financial Sector Assessment Program (FSAP) Update for Denmark in crisis management, bank resolution, and financial sector safety nets. - Based on a desk review of legal and policy documents and discussions with Danish authorities and private sector representatives during the mission (June 17–July 2, 2014). - Takes into account emerging international good practices (notably the Key Attributes of Effective Resolution Regimes for Financial Institutions and Core Principles for Effective Deposit Insurance Systems). - Prepared by Constant Verkoren (Monetary and Capital Market Department) and Carine Chartouni (Legal Department). ### Authorities’ crisis response and legacy - Authorities’ response was prompt and decisive; large-scale government guarantees ensured banks’ access to funding and recapitalization instruments buttressed regulatory capital positions. - The financial sector has paid for the support measures, resulting in a windfall for the Danish government. - October 2010: introduction of a resolution scheme with bail-in features anticipating expiration of government guarantees. - Danish resolution scheme allowed orderly winding-up by transferring assets and part of liabilities to the Financial Stability Company (FSC) or third-party acquirers. - Losses allocated to private sector via write-downs of shareholders and uninsured and unsecured creditors, including holders of senior debt and large depositors. ### Key findings on system structure and crisis impact - Banking sector (banks and mortgage credit institutions, MCI) accounts for two-thirds of financial sector assets and is over four times domestic GDP. - Danske Bank Group: total group assets at end-2013 exceeding 180 percent of GDP; lending and deposit market shares of 5–10 percent in Nordic countries; about 30 percent of group’s credit exposures related to Nordic clients. - Nordea: deposit market share for households and corporates of about 25 percent; lending market shares around the 20 percent mark. - Real GDP fell by nearly 6 percent in 2009. - Banks recorded substantial losses from impairments and write-downs (of about 8½ percent of GDP). - Roskilde Bank (failure, summer 2008): - Balance sheet just under DKK 43 billion (€5.75 billion at the exchange rate prevailing at the time); about 105,000 customers. - Purchase price for transferred assets set at DKK 37.35 billion (around €5 billion), plus capital contribution of DKK 4.5 billion (around €603 million). - Buyers acquired about DKK 10 billion (around €1.3 billion) of loans and deposits of DKK 5 billion (€670 million), with the difference to be paid in cash, including DKK 550 billion in goodwill. - Structural weaknesses exacerbating crisis impact: reliance on wholesale interbank funding, rapid leverage increase, underestimation of real estate risks, regulatory gaps, governance weaknesses, compliance-based supervision, and insufficient legal basis for proactive interventions. - Repair ongoing: reliance on wholesale short-term funding decreased; liquidity improved; all large commercial banks returned to profitability in 2012, though earnings remain under pressure. - Total capital adequacy ratio for Danish banking system increased from 12 percent in 2007 to 18 percent in June 2014; low average risk weights reflect high share of mortgage lending and low loss-given-default rates. - Efforts to strengthen bank resolution framework ongoing, including transposition of the Bank Recovery and Resolution Directive (BRRD); potential voluntary entry into euro area banking union would subject Denmark to the Single Resolution Mechanism. ### Main policy recommendations (high-level, prioritized) - Institutional framework - Designate an administrative resolution authority. (Short term) — MoBG - Clarify the role of each agency and formalize interactions. (Short term) — All - Cross-border coordination - Establish crisis management groups and formalize firm-specific cooperation on resolution. (Short term) — FSC, DFSA - Continue regional harmonization of national resolution regimes (e.g., application of bail-in requirements) and introduce mechanisms to give effect to foreign resolution actions. (Medium term) — MoBG, FSC - Crisis preparedness - Prepare, at least for domestic SIFIs, resolution plans and resolvability assessments and provide further guidance on recovery plans. (Short term) — FSC, DFSA - Conduct recurrent crisis management simulations (also at a regional level). (Medium term) — All - Financial support and ELA - Amend framework to provide Danmarks Nationalbank (DN) explicit power to grant ELA and prepare (internal) policy guidelines. (Medium term) — DN - Strengthen funding arrangements for resolution purposes. (Short term) — MoBG - Resolution framework and tools - Expand resolution toolkit, inter alia by introducing early resolution triggers and additional resolution powers. (Short term) — MoBG, FSC, DFSA - Explicitly limit judicial review to monetary compensation. (Short term) — MoBG - Bank liquidation and creditor hierarchy - Introduce depositor preference. (Short term) — MoBG - Deposit Guarantee Scheme (DGS) - Enhance DGS by strengthening governance arrangements, shortening maximum payout periods, fortifying funding (including back-stop arrangements), and removing mandatory offsetting. (Medium term) — MoBG Note: Short-term indicates within 18 months; medium-term indicates within 18 months to three years. ### Recommendations—resolution framework and safety nets (analysis and rationale) - Institutional capacity - Establish an administrative resolution authority with broad mandate, operational independence, robust governance, adequate resources, and legal protection. - Resolution feasibility - Enhance framework to enable resolution of all banks without systemic disruption and without exposing taxpayers to loss by: - Introducing additional powers to affect and support resolution actions; - Introducing further qualitative and quantitative triggers for early entry into resolution; - Preparing resolution plans and resolvability assessments at least for systemically important firms; - Limiting legal remedies to monetary compensation. - Cross-border coordination - Pursue continued harmonization of national resolution regimes and closely coordinate resolution strategies regionally for institutions with cross-border impact, including harmonization on bail-in application. - Deposit insurance and payout - Enhance DGS governance, fortify funding mechanisms (including a robust public-backstop), and remove mandatory offsetting. - Amend creditor hierarchy to provide (insured) depositors with preferential claims on assets of a failed bank, in line with BRRD requirements. - Emergency Liquidity Assistance (ELA) - Provide DN explicit legal power to grant ELA and prepare internal policy guidelines. --- ### Allocation of resolution powers and operational constraints - The Financial Business Act provides the DFSA with certain powers to deal with a bank in distress. - DFSA must seek a mandate from the MoBG, on a case-by-case basis, to act beyond normal supervisory tasks after determining need to intervene in a resolution. - DFSA initiates resolution process via enforcement of minimum capital requirements, but transfer of assets and parts of liabilities to FSC depends on decision made by the bank’s management. - FSC has resolution powers in the context of transfers under Bank Package III, namely to establish bridge banks and exercise bail-in. ### Recommendation: designate and empower a resolution authority (Key Attributes alignment) - Authorities encouraged to designate an administrative authority (or authorities) responsible for exercising resolution powers in line with the Financial Stability Board’s Key Attributes. - Where multiple authorities are designated, roles and responsibilities should be clearly defined, with a lead authority coordinating resolution actions across a group. - Resolution authority should have: - A sufficiently broad mandate focused on financial stability; protect depositors, avoid unnecessary destruction of value, minimize overall costs; consider impact on other jurisdictions. - Operational independence with safeguards against undue political or industry influence. - Robust governance: clear responsibilities, appointment/dismissal rules, code of conduct, conflicts-of-interest rules. - Adequate resources or ability to quickly ramp up; ability to commission outside experts. - Rigorous evaluation and accountability mechanisms, including review procedures. - Staff should be protected against liability for actions taken in good faith. ### Fine-tuning roles and information exchange - DFSA, FSC, MoBG, DN, and DGS compose current institutional setup. - Transposition of BRRD should reconfirm allocation of responsibilities and mandates. - Legal amendments recommended to formalize information sharing: - DFSA–FSC: establish formal procedure and operational guidelines on providing information to FSC. - DFSA–DGS: include amendments allowing explicit exchange of information and put in place an MOU. - DN–DFSA: formal agreements exist; DN Act (Section 20) and a 2010 formal agreement support information sharing. ### Danish Coordination Group (DCG) - DCG effective forum for crisis coordination; role could expand to crisis preparedness in normal times. - Suggested uses: discuss crisis management framework improvements and coordinate crisis-management simulation exercises. ### Institutional framework snapshot (Box 2) - DN: central bank; grants ELA to solvent but illiquid banks against adequate collateral; banker to FSC in winding-up. - DFSA: prudential supervisor; early intervention powers; initiates resolution. - FSC: state-owned limited company established 2008 to resolve failing banks via transfers to subsidiaries (bridge banks) or third-party buyers. - MoBG: sets crisis management and resolution policy; provides DFSA mandates on a case-by-case basis; designated macroprudential authority for CRR/CRDIV. - DGS: private self-governing institution; depositor payout mandate; provides FSC guarantees via Winding-up Department. - DCG: high-level coordination committee established 2005; not a decision-making body. --- ### Cross-border coordination: status and enhancements - Framework broadly appropriate vis-à-vis regional peers but could benefit from issue-specific enhancements. - Components: - MOUs: Nordic-Baltic Cooperation Agreement (2010) provides preliminary framework for sharing crisis management costs based on asset distribution and supervisory responsibilities; established Nordic-Baltic Cross-Border Stability Group. - Supervisory colleges: DFSA participates in Nordea and Danske supervisory colleges. - Crisis Management Groups (CMG): DFSA participates in CMG for Nordea; recommended to establish CMGs for Danish SIFIs with foreign subsidiaries (e.g., Danske). - Institution-specific COAG: firm-specific resolution colleges should be established; none signed yet. - Recommendations: - Harmonize resolution framework and toolkit in Nordic-Baltic region. - Coordinate on bail-in application requirements. - Provide transparent and expedited mechanisms to give effect to foreign resolution measures (mutual recognition or consistent domestic measures). - Legal framework does not discriminate against creditors on nationality. --- ### Recovery and Resolution Planning (RRPs) and resolvability - Annex 3 of the Key Attributes (November 2011) sets out essential RRP elements. - EU implementation: RRPs required in Directive 2013/36/EU (CRD) and BRRD; EBA Recommendation EBA/REC/2013/02 (January 23, 2013). - Danish implementation: - DFSA Executive Order no. 284 of March 27, 2014 applies to banks, MCIs, and certain investment firms with assets of DKK 1 billion or more. - Recovery plan contents: capital and liquidity measures; critical functions and continuity measures; strategies to reduce RWA; list of possible merger partners. - Submission deadlines: initial plans by October 1, 2014; annual updates by June 30 of each calendar year unless assets drop below DKK 1 billion. - Committee on Systemically Important Financial Institutions (Box 4) key recommendations: - SIFI identification by consolidated-level criteria (total assets relative to GDP; loans relative to total loans; deposits relative to total deposits); one threshold sufficient. - Additional SIFI buffers: Common Equity Tier 1 surcharge between 1 percent and 3.5 percent of RWA; separate crisis management buffer of 5 percent of RWA (debt convertible to CET1 or write-down). - SIFI recovery and resolution planning: recovery plans launched (latest) when SIFI capital requirement breached. - Crisis management trigger: initiate bank resolution proceedings at 10.125 percent of total capital (versus 8 percent for non-SIFIs). - SIFI liquidity requirement: implement liquidity coverage ratio as of 2015. - Expanded resolution toolkit and institutional framework: establishment of a resolution authority and a stability fund as of 2020 financed by Danish SIFIs. - Current status and recommendations: - DFSA interacted with Danske Bank on recovery plan using draft EBA guidelines; comprehensive RRPs and resolvability assessments for Danish SIFIs not yet initiated pending BRRD transposition. - Publish detailed guidance on critical functions, resolution triggers, early warning indicators, and stress scenarios. - Introduce explicit powers to address impediments to resolvability and ensure close coordination between prudential supervisor and resolution authority. - Crisis management simulations: - Conduct recurrent simulations (e.g., annual) involving all public stakeholders and safety-net components; consider regional simulations leveraging Nordic-Baltic arrangements. --- ### Early intervention and supervisory framework - DFSA supervisory approach: risk-sensitive framework with strong Board responsibilities and Supervisory Diamond tracking five indicative ratios: sum of large exposures, lending growth, commercial real estate exposures, stable funding and excess liquidity coverage; threshold ratios defined and noncompliance published. - Supervisory powers and ladder: - DFSA can require removal of a Board member if fitness and propriety criteria not met (Article 351); fit-and-proper tests do not cover some key positions such as chief risk officer. - Ladder stages: intensified surveillance and mandatory disclosure; detailed inspections and management analyses (Article 349); corrective actions then license withdrawal (Article 350). - DFSA can require capital plans where minimum capital met but Pillar II not met; may withdraw license if capital actions not taken (Articles 225 and 124). - Inspection cycle limitation: on-site inspections comprehensive but extended schedules may delay verification; for smaller firms, on-site verification can take up to six years absent off-site red flags. --- ### Crisis containment measures, past interventions, and Bank Packages - Principles: combine arrangements for temporary official support, robust going-concern resolution powers, and orderly liquidation mechanisms. - Bank Package I (October 2008): - Two-year state guarantee covering all depositor claims and other unsecured creditors of banks domiciled in Denmark. - Establishment of FSC as state-owned winding-up company. - Financial sector contribution DKK 25 billion (DKK 15 billion in commissions for state guarantee and DKK 10 billion contribution to winding-up costs). - Additional contribution up to DKK 10 billion if FSC losses exceeded DKK 25 billion (not triggered). - Guarantee expired September 30, 2010. - Estimates: Package I generated an upside of DKK 2.5 billion (difference between industry contribution DKK 25 billion and aggregate cost DKK 22.5 billion). - Bank Package II (January 2009): - Capital support up to DKK 100 billion in hybrid instruments to reach Tier 1 ratio of 12 percent. - State-guaranteed debt issuances up to 3 years maturity. - Applications until June 30, 2009; guaranteed debt issuances until December 31, 2010. - When expired, capital injections amounted to approximately DKK 46 billion distributed among 43 institutions; debt issuances by 50 institutions totaled DKK 193 billion. - Aggregate windfall for state of all Bank Packages estimated at DKK 12.15 billion (about 0.8 percent of GDP) as of January 2014. --- ### Emergency Liquidity Assistance (ELA) — purpose, operations, and strengthening - ELA purpose: provide liquidity to mitigate sudden funding pressures and prevent contagion and systemic loss of confidence. - DN’s ELA role: - DN liquidity management via ordinary weekly market operations; excess liquidity absorbed through sale of certificates of deposit. - DN Act provides role and Section 20 expressly provides for information sharing with prudential supervisors. - DN provided ELA on three occasions, lastly in 2008, each backed by loss guarantees. - Exceptional measures October 2011: expanded collateral basis accept bank credit claims increasing collateral by up to DKK 400 billion; introduced six-month variable-rate lending facility. - Exceptional measures fully phased out as of July 1, 2014. - Temporary three-year lending facility introduced in parallel with ECB three-year operations maturing March and September of 2015. - Strengthening recommendations: - Provide DN explicit legal power to grant ELA to solvent but temporarily illiquid institutions, subject to adequate collateral. - Prepare internal guidelines and action plans specifying eligible counterparties; decision arrangements; acceptable collateral; pricing and maturity guidance; additional recipient conditions. - Formalize DN–DFSA coordination on ELA (consultation at request and coordination after provision), including intensified supervision of ELA recipients, potentially involving continuous on-site DFSA presence. - Consider flexible disclosure arrangements balancing transparency and financial stability; allow timing/content flexibility subject to DFSA notification. --- ### Overview of Danish resolution scheme (Bank Package III) — small- and medium-size firms - Scheme (October 2010) permits transfer of distressed bank assets and part of liabilities to FSC subsidiaries (bridge banks) or third-party acquirers, winding up remainder through ordinary liquidation. - FSC can allocate losses to shareholders and subordinated debt by leaving their claims in the residual entity. - Process initiated by DFSA if bank fails to meet capital requirements within DFSA deadline. - Steps in resolution: - Decision to use scheme activated via notification from bank management requesting winding-up under the scheme if private solutions fail. - FSC conducts preliminary asset review to determine minimum realizable value (excluding goodwill); preliminary transfer value based on estimated realizable values. - Split: assets transferred to licensed FSC subsidiary (“new bank”) which takes over proportional share of nonsubordinated liabilities; insured deposits protected (DGS resources if necessary); other unsecured senior creditors face haircuts (bail-in); equity and subordinated creditors remain with residual entity. - “New bank” disposal: FSC injects capital/liquidity and sells transferred assets gradually; losses absorbed by industry via DGS Winding-up Department loss guarantees. - Final compensation determined by two independent auditors; additional dividend may be available to nonsecured creditors depending on valuation. ### Legal triggers, gaps, and toolkit expansion - DFSA lacks explicit legal power to compel failing bank to enter resolution; transfer depends on failing bank’s Board agreement. - Current quantitative trigger: breach of capital requirement and non-adherence after compliance notice (Article 246 (1) of the Financial Business Act). - Recommendation: provide additional quantitative and qualitative resolution triggers and clear non-viability indicators to guide entry decisions. - Expand toolkit to include forced recapitalization and merger, appointment of official administrators, mandatory debt restructuring (bail-in) in going-concern resolution by writing down or converting liabilities to equity. - Ensure availability of sufficient debts capable of being bailed-in at resolution time. ### Official administration (public control) - Law silent on appointing official administrators to take control and manage affected firms; DFSA can replace unfit Directors but not fully assume management. - Official administrators would assume Board/shareholder powers to assess, design, and implement rehabilitation plans or prepare liquidation. - BRRD envisages introduction of such administrators (Article 29 of Directive 2014/59/EU). - Administrators need broad powers and accountability to resolution authority; can facilitate resolution planning and maintain confidentiality to avoid erosion of public confidence. ### Legal remedies and court constraints - Law does not explicitly limit courts’ remedies to monetary damages; courts could halt implementation or unwind executed transactions. - DFSA decisions to remove Directors could be challenged, potentially enabling Director to retain position during proceedings. - Valuation after transfer to FSC or third party can be tested in court via lawsuit within no later than three months after valuation receipt. - Recommend targeted legal amendments to limit scope of legal remedies to monetary compensation, subject to “no creditor worse off than in liquidation” test. --- ### Funding of firms in resolution and recommended consolidation - Funding essential for liquidity, capitalizing bridge banks, and facilitating transfers subject to “least cost” test. - Current funding mix: - Banking Department of DGS (ex ante financed) can contribute to resolution under Bank Package IV. - Loss guarantees from DGS’ Winding-up Department allow allocation of losses to industry on an ex post basis. - FSC has unlimited access to Danish government’s re-lending facility allowing FSC to raise loans mirroring domestic government bond terms. - Recommendation: consolidate funding via a robust resolution fund that: - Is gradually built up via industry contributions; - Has power to impose extraordinary contributions on the industry; - Benefits from a robust public backstop when resources insufficient. - Fund design considerations: - Target level and contributions to reflect potential outlays and sector characteristics. - Given banking system size relative to GDP, consider target level exceeding BRRD minimum of 1 percent of covered deposits. - Phase-in period recommended (e.g., 5 to 10 years); initial flat-rate contributions easing implementation with eventual risk-adjustment. - Benchmark: average fiscal cost of government interventions during financial crisis for advanced G-20 countries suggests financing need just below 3 percent of GDP. --- ### Bank liquidation, creditor hierarchy, and depositor preference - Banks and MCIs not excluded from ordinary insolvency proceedings under Bankruptcy Act; debtor insolvent when unable to meet liabilities as they become due unless inability deemed temporary. - Financial Business Act derogations: banks considered insolvent when unable to meet obligations regarding subordinated capital taken up as hybrid core capital or subordinated loan capital (earlier threshold). - Bankruptcy trustee appointment requires prior DFSA consultation (DFSA opinion de jure not binding but always considered; mission recommends enshrining this). - Bankruptcy trustees empowered to transfer assets and part of liabilities to FSC under resolution measures (mutatis mutandis). - Creditor hierarchy: current legislation does not provide depositor preference; all creditors, including insured depositors, rank pari passu with other unsecured creditors under Bankruptcy Act. - Advantages of depositor preference: reduces depositor losses, enhances confidence, helps DGS recoveries, avoids legal challenges, increases market discipline. - Potential drawbacks: could raise bank funding costs or affect unsecured wholesale funding; requires sufficient unsecured liabilities to absorb losses. - Forms of depositor preference described: - Insured depositor preference; - General depositor preference; - Tiered depositor preference. - BRRD provides tiered depositor preference: (i) covered deposits and DGS subrogated claims priority; (ii) eligible deposits from natural persons and SMEs above coverage level priority over ordinary unsecured creditors. - Cross-border coordination: differences in creditor hierarchy may hinder cooperation; territorial limits on depositor preference could prompt ring-fencing by hosts. --- ### Mortgage Credit Institutions (MCIs): liquidation and alternatives - MCIs have no depositors warranting immediate protection; Mortgage-Credit Act prevents early bond repayment upon bankruptcy, hardening MCIs against runs. - Liquidator can: - Raise additional loans via junior covered bonds subordinated to other bonds; - Refinance maturing bonds; - Provide additional collateral. - Amendments permit mandatory maturity extension by one year if insufficient demand or interest rates increase by more than 5 percentage points; failed auctions convert bonds to long-dated fixed-rate instruments aligned with underlying mortgage terms. - Recommendations: consider alternatives for distressed MCIs including early intervention powers (transfer of covered pools and affiliated bonds to healthy institution or bridge bank) and appointment of official administrator. - Rationale: covered bond market concentration (two largest MCIs >70 percent) risks spillovers; failure of large MCI impacts mortgage financing availability; mandatory maturity extensions may be pro-cyclical; winding-up assumes continued servicing capabilities over prolonged period. --- ### Deposit Guarantee Scheme (DGS): structure, membership, and reforms - DGS is private, self-governing, established by act of parliament; supervised by DFSA. - Legal framework: Guarantee Fund for Depositors and Investors Act (last amended June, 2013) and Executive Order no. 679 of November 13, 2013. - Membership compulsory for all banks and MCIs operating in Denmark. - At end-2013, DGS comprised 150 institutions, including 99 banks and seven MCIs. - Coverage up to €100,000 (approximately DKK 745,000) with certain exceptions. - At end-September 2013, net covered deposits amounted to about DKK 845 billion, approximately 43 percent of total deposits. - Exclusions: deposits of institution directors; subordinated debt; deposits from transactions subject to money laundering judgments. - Deposits covered in full without €100,000 cap: certain savings schemes, children’s savings accounts, home savings contracts, educational savings accounts, temporary deposits related to purchase of noncommercial real estate up to nine months. ### Offsetting depositor claims - Current practice: depositor claims for coverage are calculated after deduction of obligations to the institution. - Concern: offsetting can hinder timely reimbursements and cause hardship for depositors with loans in good standing. - Recommendation: limit offsetting of insured deposits, at maximum with loans that are past due (align with recast DGS Directive); limiting offsetting increases base for industry contributions and strengthens DGS funding. ### Governance and independence - DGS Board: eight members appointed by MoBG for 3 years; four independent (including chairman and deputy); four industry representatives (two banks, one MCIs, one investment firms). - Conflict-of-interest safeguard: members with personal/economic interest precluded from participating in relevant meetings. - Concerns: industry representatives may limit early engagement and jeopardize independence. - Recommendations: - Consider removal of industry representatives from Board while introducing oversight body for ex post accountability and maintain industry representation. - Introduce fit-and-proper criteria for all Board members. - Explicitly state reasons for early removal and mandate disclosure. - Introduce legal protection for DGS Board and staff for actions in good faith. ### Funding, backstops, and reimbursement timing - Prior to March 2012: ex post loss sharing; risks moral hazard and procyclicality. - Bank Package IV: move toward ex ante financed system with target fund of 1 percent of covered net deposits (approx. DKK 8 billion); annual contribution 0.25 percent of net covered deposits. - DGS Board can increase contributions as extraordinary measure; DFSA can mandate increase after DN consultation. - Board required to maintain liquid assets and loan commitments at least 0.75 percent of covered net deposits in an account at DN. - Remaining needs: build resources, especially if offsetting limited. - Backstop arrangements: - Departments may borrow up to 50 percent of required cash resources of other departments, subject to max DKK 100 million per department per year. - DGS may raise market loans against state guarantee (subject to Finance Committee approval). - Concern: backstops may be insufficient in severe stress and may signal distress. - Recommendation: consider providing DGS with unsecured credit line from MoF (funds made available by DN) for immediate drawdown. - Reimbursement timing: - Maximum payout period: 20 business days after commencement of restructuring or bankruptcy, extendable by 10 business days (20/30 days). - Concern: 20 (30) days may cause depositor difficulties. - Recommendation: consider shorter maximum payout period (recast DGS Directive mandates shorter period). - Operational readiness: robust infrastructure, legal authority to direct banks to submit depositor records, coordination protocols, policies and controls within DGS. ### Legal protection - Recommendation: supervisory and resolution authorities and staff should have legal protection against liability for actions taken in good faith; limit liability to exclude gross negligence or willful misconduct. - Employees should have statutory right to indemnification for defense costs. - Administrators, liquidation trustees, and DGS should enjoy legal protection for actions in good faith. - Directors under resolution: statutory protection limited to implementing measures decided by resolution authority; protection should not cover prior actions that contributed to distress. --- ### Annex highlights and selected figures - Since 2008, 12 Danish banks taken over by FSC under Bank Packages. - At end-December 2013, residual exposures of FSC for winding-up FSC amounted to approximately DKK 16.5 billion, largely customer deposits (DKK 12.8 billion). - Selected Bank Packages: - Bank Package I (October 2008): sector covered losses up to DKK 35 billion (2 percent of GDP). - Bank Package II (January 2009): banks drew DKK 46 billion (around 3 percent of GDP) in solvency support and DKK 193 billion (12.5 percent of GDP) in state-guaranteed debt instruments. - Bank Package III (October 2010): haircut for unsecured (and uninsured) creditors including depositors above DKK 750,000 (EUR 100,000). - Bank Package IV (September 2011): introduced annual fixed payments to strengthen funding of Guarantee Fund. - Bank Package V (March 2012): sale of real estate loans from FIH Erhversvbank to FSC backed by unlimited loss guarantee. - Bank Package VI (October 2013): introduced more stringent solvency and liquidity requirements for systemically important banks and MCIs. *IMF staff summary of the EXECUTIVE SUMMARY and selected chapters/annexes of the IMF FSAP Update for Denmark (mission June 17–July 2, 2014).* ### EXECUTIVE SUMMARY ___________________________________________________________________________ 5 ### EXECUTIVE SUMMARY ### This note - Elaborates on findings and recommendations from the Financial Sector Assessment Program (FSAP) Update for Denmark in crisis management, bank resolution, and financial sector safety nets. - Based on a desk review of legal and policy documents and discussions with Danish authorities and private sector representatives during the mission (June 17–July 2, 2014). - Takes into account emerging international good practices (notably the Key Attributes of Effective Resolution Regimes for Financial Institutions and Core Principles for Effective Deposit Insurance Systems). - Prepared by Constant Verkoren (Monetary and Capital Market Department) and Carine Chartouni (Legal Department). ### Authorities’ crisis response and legacy - Authorities’ response was prompt and decisive; large-scale government guarantees ensured banks’ access to funding and recapitalization instruments buttressed regulatory capital positions. - The financial sector has paid for the support measures, resulting in a windfall for the Danish government. - In October 2010 authorities introduced a resolution scheme with bail-in features in anticipation of expiration of government guarantees. - The Danish resolution scheme enabled orderly winding-up of affected banks by transferring all assets, and part of the liabilities, to the Financial Stability Company (FSC) or third-party acquirers. - Losses were allocated to the private sector via write-downs of shareholders and uninsured and unsecured creditors, including holders of senior debt and large depositors. ### Key findings on system structure and crisis impact - The banking sector (banks and mortgage credit institutions, MCI) accounts for two-thirds of financial sector assets and is over four times domestic GDP. - Danske Bank Group: total group assets at end-2013 exceeding 180 percent of GDP; lending and deposit market shares of 5–10 percent in Nordic countries; about 30 percent of group’s credit exposures related to Nordic clients. - Nordea: deposit market share for households and corporates of about 25 percent; lending market shares around the 20 percent mark. - Real GDP fell by nearly 6 percent in 2009, reflecting in part the housing bust. - Banks registered substantial losses from impairments and write-downs (of about 8½ percent of GDP). - Roskilde Bank (failure, summer 2008): balance sheet just under DKK 43 billion (€5.75 billion at the exchange rate prevailing at the time); about 105,000 customers. - DN granted an unlimited liquidity facility partly guaranteed by DPB and the Danish state; European Commission authorized rescue aid on July 31, 2008. - DN and DPB acquired Roskilde’s assets and liabilities (except hybrid capital instruments and subordinated debt) via ‘Roskilde New’. - Purchase price for transferred assets set at DKK 37.3 5 billion (around €5 billion), plus capital contribution of DKK 4.5 billion (around €603 million). - Buyers acquired about DKK 10 billion (around €1.3 billion) of loans and deposits of DKK 5 billion (€670 million), with the difference to be paid in cash, including DKK 550 billion in goodwill. - Rigsrevisionen review found DFSA aware of emerging problems but failed to conduct sufficiently systematic follow-up, prompting prudential enhancements. - Structural weaknesses exacerbated crisis impact: reliance on wholesale interbank funding, rapid leverage increase, underestimation of real estate risks, regulatory gaps, governance weaknesses, compliance-based supervision, and insufficient legal basis for proactive interventions. - Repair of the sector is ongoing: reliance on wholesale short-term funding decreased; liquidity improved; all large commercial banks returned to profitability in 2012, though earnings remain under pressure. - Total capital adequacy ratio for the Danish banking system increased from 12 percent in 2007 to 18 percent in June 2014; low average risk weights reflect high share of mortgage lending and low loss-given-default rates. - Efforts to strengthen the bank resolution framework were ongoing, including transposition of the Bank Recovery and Resolution Directive (BRRD); possible voluntary entry into the euro area banking union would subject Denmark to the Single Resolution Mechanism. ### Main policy recommendations (high-level, prioritized) - Institutional framework - Designate an administrative resolution authority. (Short term) — MoBG - Clarify the role of each agency and formalize interactions. (Short term) — All - Cross-border coordination - Establish crisis management groups and formalize firm-specific cooperation on resolution. (Short term) — FSC, DFSA - Continue regional harmonization of national resolution regimes (e.g., application of bail-in requirements) and introduce mechanisms to give effect to foreign resolution actions. (Medium term) — MoBG, FSC - Crisis preparedness - Prepare, at least for domestic SIFIs, resolution plans and resolvability assessments and provide further guidance on recovery plans. (Short term) — FSC, DFSA - Conduct recurrent crisis management simulations (also at a regional level). (Medium term) — All - Financial support and ELA - Amend framework to provide Danmarks Nationalbank (DN) explicit power to grant ELA and prepare (internal) policy guidelines. (Medium term) — DN - Strengthen funding arrangements for resolution purposes. (Short term) — MoBG - Resolution framework and tools - Expand resolution toolkit, inter alia by introducing early resolution triggers and additional resolution powers. (Short term) — MoBG, FSC, DFSA - Explicitly limit judicial review to monetary compensation. (Short term) — MoBG - Bank liquidation and creditor hierarchy - Introduce depositor preference. (Short term) — MoBG - Deposit Guarantee Scheme (DGS) - Enhance DGS by strengthening governance arrangements, shortening maximum payout periods, fortifying funding (including back-stop arrangements), and removing mandatory offsetting. (Medium term) — MoBG Note: Short-term indicates within 18 months; medium-term indicates within 18 months to three years. ### Recommendations on strengthening resolution framework and safety nets (analysis and rationale) - Institutional capacity - Establish an administrative resolution authority with a sufficiently broad mandate, operational independence, robust governance, adequate resources, and legal protection. - Resolution feasibility - Enhance framework to make feasible resolution of all banks without systemic disruption and without exposing taxpayers to loss by: - Introducing additional powers to affect and support resolution actions; - Introducing further qualitative and quantitative triggers for early entry into resolution; - Preparing resolution plans and resolvability assessments at least for systemically important firms; - Limiting legal remedies to monetary compensation. - Cross-border coordination - Given potential Nordic-Baltic spillovers, pursue continued harmonization of national resolution regimes and closely coordinate resolution strategies regionally for institutions with cross-border impact, including harmonization on bail-in application. - Deposit insurance and payout - Targeted enhancements of the DGS should include enhanced governance, fortified funding mechanisms (including a robust public-backstop), and removal of mandatory offsetting. - Amend creditor hierarchy to provide (insured) depositors with preferential claims on assets of a failed bank, in line with BRRD requirements. - Emergency Liquidity Assistance (ELA) - Provide DN explicit legal power to grant ELA and prepare internal policy guidelines. ### Structure of the full note - Chapter II: Institutional framework and coordination arrangements (domestic and cross-border). - Chapter III: Crisis preparedness. - Chapter IV: Early intervention as first line of defense. - Chapter V: Danish toolkit for crisis management — crisis containment measures, ELA, resolution regime, bank liquidation. - Chapter VI: Deposit Guarantee Scheme. - Chapter VII: Legal protection observations. _This summary is based on the EXECUTIVE SUMMARY of the IMF FSAP Update for Denmark (mission June 17–July 2, 2014)._ ### 6. The resolution powers in the current regime are largely allocated to the FSC. The ### 6. The resolution powers in the current regime are largely allocated to the FSC. ### Current allocation of resolution powers and operational constraints - The Financial Business Act provides the DFSA with certain powers to deal with a bank in distress. - The DFSA must seek a mandate from the MoBG, on a case-by-case basis, to be able to act beyond its normal supervisory tasks following its determination of the need to intervene in a resolution of a bank. - The DFSA initiates the resolution process via the enforcement of minimum capital requirements, but the transfer of the assets and parts of the liabilities of the bank to the FSC depends on a decision made by the bank’s management. - The FSC has resolution powers in the context of the transfer of the bank’s assets and part of the liabilities under Bank Package III, namely to establish bridge banks and exercise bail-in. ### Recommendation: designate and empower a resolution authority (Key Attributes alignment) - Authorities are encouraged to designate a designated administrative authority (or authorities) responsible for exercising resolution powers over firms within the scope of the resolution regime, in line with the Financial Stability Board’s Key Attributes of Effective Resolution Regimes for Financial Institutions (Key Attributes). - Where multiple authorities are designated, roles and responsibilities should be clearly defined, with the authorities identifying a lead authority that coordinates resolution actions across different entities of the same group within Denmark. - The designated resolution authority (authorities) should have: - A sufficiently broad mandate with a focus on financial stability, including adequate resolution powers, as part of its statutory objectives and functions. In coordination with the relevant insurance schemes, the resolution authority should protect depositors, avoid unnecessary destruction of value, and seek to minimize the overall costs of resolution. Further, the resolution authority should duly consider the potential impact of its resolution actions on financial stability in other jurisdictions; - Operational independence, including safeguards against undue political or industry influence that would compromise its ability to obtain or deploy the resources needed to carry out its mandate and achieve an effective resolution; - A robust governance structure that defines the responsibilities, authorities, and accountability of its governing body and senior management; promotes sound decision-making and effective control and oversight of personnel, including via (i) rules and procedures for the appointment and dismissal of the head of the authority, members of the governing body (where relevant) and senior management; and (ii) a code of conduct, including rules on conflicts of interest; - Adequate resources (or at least the ability to quickly ramp up resources whenever necessary) and sufficient operating funds to attract and retain staff with sufficient expertise, and in sufficient numbers, to carry out its functions and to commission outside experts to the extent necessary to fulfill its tasks; and - Rigorous evaluation and accountability mechanisms that include procedures for reviewing and evaluating actions that the resolution authority takes in carrying out its statutory responsibilities. - The resolution authority and its staff should be protected against liability for actions taken and omissions made while discharging their duties in good faith. ### Fine-tuning roles of other crisis-management agencies after designation - Current institutional set-up for resolution involves DFSA, FSC, MoBG, DN, and the Danish DGS. - As part of the transposition of the BRRD, the allocation of responsibilities between the different agencies involved in crisis management and bank resolution should be reconfirmed, together with their respective mandates and roles. - A formal summary of current powers and responsibilities of key institutions is provided (Box 2). ### Legal underpinning and information exchange: progress and gaps - The law was amended during the crisis to allow for the DFSA to provide confidential information to authorities involved in attempts to save a limited company in critical difficulty, provided that the recipient adequately safeguards the confidentiality of the received information (Article 354 (6) (10) of the Financial Business Act). - DFSA and DN: - DN and DFSA have a strong tradition of close cooperation; management Boards meet quarterly. - The DN Act expressly provides for the sharing of information between the DN and the prudential supervisors (Section 20 of the Danmarks Nationalbank Act). - A formal agreement was signed between the DFSA and the DN in 2010 for the purpose of accessing information on a regular basis. - DFSA and FSC: - The DFSA provides the FSC with information regarding a failing bank as soon as the DFSA receives a mandate from the MoBG to intervene in the resolution of such bank, and based on Article 345 (6) (10) of the Financial Business Act. - The mission recommends establishing a formal procedure and operational guidelines on the provision of such information to the FSC. - DFSA and the DGS: - The DFSA supervises the DGS and both entities can request information from the DGS contributors, depositors, and investors to ensure compliance with the Guarantee Fund for Depositors and Investors Act. - While DFSA and DGS de facto coordinate and exchange information when necessary, the legal framework does not expressly provide for information sharing between the two institutions. - The FSC also provides the DGS with relevant information it receives from the DFSA relating to a bank that enters into resolution. - The mission recommends including amendments to the law allowing for the exchange of information between the DFSA and the DGS, and putting in place a Memorandum of Understanding (MOU) to formalize the specific details for such sharing of information. ### Role and potential expansion of the Danish Coordination Group (DCG) - The Danish Coordination Group (DCG) for financial stability served as an effective forum for crisis coordination; its role could be expanded to cover crisis preparedness in normal times. - The DCG provided a platform for interagency coordination during the financial crisis and is currently shifting to high-level discussions on legislative proposals and international developments. - The mission encourages authorities to maintain the DCG as a national forum for exchange of information and cooperation among stakeholders involved in crisis management and bank resolution. - Suggested uses for the DCG: - Discuss potential improvement of the crisis management framework; - Coordinate and undertake crisis-management simulation exercises aimed at testing and improving crisis preparedness. ### Institutional framework summary (Box 2) - DN — central bank of Denmark; responsible for payment system; grants ELA to banks that are solvent but face liquidity difficulties against adequate collateral; mandate includes maintaining a safe and secure currency system and facilitating the extension of credit (Section 1 of the DN Act); two tasks when a failing bank is being wound up: one based on payment system role and another as banker to the FSC. - DFSA — prudential supervisor for financial undertakings; licenses, regulates, and supervises financial undertakings pursuant to the Financial Business Act; has early intervention powers vis-a-vis banks and is responsible for initiating resolution. - FSC — established in 2008 as a limited company owned by the Danish government; role to resolve failing banks by transferring their assets and part of their liabilities, either to subsidiaries it specifically creates for this purpose (bridge bank) or to third-party buyers, while winding-up the nontransferable liabilities (share capital and subordinated debt). - MoBG — sets policy framework for crisis management and bank resolution; provides the DFSA with a specific mandate, on a case-by-case basis, to intervene in the resolution of a failing bank; designated macroprudential authority for the purpose of the CRR/CRDIV implementation; participates in the DCG and the Systemic Risk Council; issues executive orders, rules, and regulations for implementation of the Financial Stability Act and the Financial Business Act. - DGS — Danish DGS is a private self-governing institution; primary mandate is depositor payout in case of bank failures; pursuant to the Guarantee Fund for Depositors and Investors Act, provides the FSC with a guarantee against losses the latter incurs following the recapitalization of subsidiaries (bridge banks) or to cover losses incurred by the subsidiaries as a result of the winding up (funds provided by the separate Winding-up Department, financed via ex post contributions from the industry); gives a loss guarantee to the bridge bank and could provide an acquiring bank with cash injection to cover expected losses resulting from a transfer of assets and liabilities transaction with a failing bank (referred to by the authorities as “a dowry”). - DCG — established in 2005; a high-level coordination committee comprised of representatives from the DFSA, the DN, the MoBG, the Ministry of Finance (MoF), and the Ministry for Economic Affairs and Interior; served as a forum for intensive discussions during the crisis leading to issuance of different bank packages, including the current resolution regime; it is not a decision-making body. ### Cross-border coordination: status and enhancements - The current framework for cross-border coordination is broadly appropriate vis-à-vis regional peers, but could benefit from issue-specific enhancements. - Denmark’s banking sector has close regional ties and hosts Nordea, one of the designated global systemically important financial institutions (G-SIFI), calling for close coordination among Danish authorities and foreign peers throughout the life cycle of cross-border banks. - Cross-border coordination components: - MOUs: Guided by the Nordic-Baltic Cooperation Agreement on Cross-Border Financial Stability, crisis management, and resolution, signed in 2010 between central banks, financial supervisory authorities, and relevant ministries. The Agreement provided a preliminary framework for sharing costs associated with jointly agreed crisis management actions, based on (a) the relative importance of the financial group’s activities in the respective countries (as measured based on the distribution of assets) and (b) the supervisory responsibilities for the same institution in the same countries. It established a formal basis for the Nordic-Baltic Cross-Border Stability Group. The DFSA, the MOBG and the DN participate in this group. - Supervisory colleges: DFSA participates in the supervisory college set up by the Swedish supervisory authority to facilitate effective supervision of Nordea Group; DFSA, as home authority, has established a supervisory college for Danske Group. - Crisis Management Groups (CMG): DFSA participates in a CMG for Nordea as a key host authority. Authorities are encouraged to establish CMGs for Danish SIBs with foreign subsidiaries (in particular for Danske) to prepare for and facilitate a cross-border resolution, including discussing strategies (“single point of entry” or “multiple point of entry” approach). - Institution-specific, cross-border cooperation agreements (COAG): Firm-specific resolution colleges for systemically important firms with foreign activities should be established to foster effective bank resolution on a cross-border basis. Authorities have not yet signed any COAG; discussions with Swedish supervisory authorities in relation to Nordea Group have been initiated. - Recommendations for regional harmonization: - Harmonize the resolution framework, including the resolution toolkit, to the extent possible in the Nordic-Baltic region. - Coordinate on requirements for the application of bail-in powers. - Provide transparent and expedited mechanisms to give effect to foreign resolution measures, either by mutual recognition or by taking measures consistent with foreign resolution authority actions. - The Danish legal framework does not discriminate against creditors on the basis of their nationality. ### Crisis preparedness and recovery & resolution planning (RRP) - Recurrent crisis-management simulations are recommended to test procedures and scenarios and to improve crisis preparedness. - Recovery and resolution planning has evolved into a key component of effective crisis management frameworks. The concept of RRPs (also known as ‘living wills’) was articulated in early-2009 by the Financial Stability Board’s (FSB) predecessor, the Financial Stability Forum. *IMF staff summary of chapter content.* ### Annex 3 of the Key Attributes, issued in November 2011, provided a detailed ### _cr14351 - Annex 3 of the Key Attributes, issued in November 2011, provided a detailed ### Recovery and Resolution Planning (RRPs) - Annex 3 of the Key Attributes (November 2011) set out essential elements of RRPs; various country authorities have since issued detailed requirements and guidance. - EU implementation: - Requirement to prepare RRPs included in Directive 2013/36/EU (CRD) and in the BRRD. - EBA Recommendation on the development of recovery plans: EBA/REC/2013/02 of January 23, 2013. - Danish implementation: - DFSA Executive Order on the Preparation of Recovery Plans (Executive Order no. 284 of March 27, 2014) applies to banks, mortgage credit institutions (MCI), and certain investment firms with assets of DKK 1 billion or more. - As per the Executive Order, recovery plans should contain a description of: - Capital and liquidity measures to be implemented in order to enable the recovery of the firm; - The firm’s critical functions and measures to maintain these in case of distress; - Strategies to reduce risk-weighted assets, including via disposal of activities; and - A list of possible merger partners. - Submission deadlines: - Initial plans to be submitted to the DFSA no later than October 1, 2014. - Annual updates to be submitted by June 30 of each calendar year, unless the total assets of the firm drop below DKK 1 billion. ### Committee on Systemically Important Financial Institutions (Box 4) — key recommendations - Mandate: identify criteria for Danish SIFIs, requirements to be imposed, and options for resolution; focused on banks and MCIs. - Point of departure: limit probability of SIFI failure and ensure resolvability without systemic disruption or taxpayer losses. - Key recommendations: - SIFI identification: consolidated-level criteria based on total assets relative to GDP, loans relative to total loans of the sector, and deposits relative to total deposits of the sector; one threshold sufficient for classification as SIFI. - Additional SIFI buffers: - Maintenance of a Common Equity Tier 1 surcharge between 1 percent and 3.5 percent of risk weighted assets (RWA); - Separate crisis management buffer of 5 percent of RWA, consisting of debt that can be converted into Common Equity Tier 1, or written down (‘bail in’). - SIFI recovery and resolution planning: preparation of recovery and resolution plans, with recovery plans being launched (at the latest) when the SIFI capital requirement is breached. - Crisis management: trigger for initiating bank resolution proceedings set at 10.125 percent of total capital (in comparison with 8 percent for non-SIFIs); DFSA may initiate resolution if firm is no longer viable. - SIFI liquidity requirements: implementation of the (short-term) liquidity coverage ratio as of 2015. - Expanded resolution toolkit: additional resolution powers with mandatory triggers, enabling bridge banks, asset sales, and debt conversion or write-downs. - Institutional framework: establishment of a resolution authority. - Resolution funding: establishment of a stability fund as of 2020, financed by Danish SIFIs. ### Resolvability, guidance, and powers - Current status: - DFSA has interacted with Danske Bank on its recovery plan using draft EBA guidelines. - DFSA, MoBG and DN participate in the CMG for Nordea established by Swedish authorities. - Pending BRRD transposition, comprehensive resolution plans and resolvability assessments for Danish SIFIs have not yet been initiated. - Recommendations: - Publish more detailed guidance as DFSA gains experience with recovery-plan assessments to foster consistency across Danish peers. - Guidance areas beneficially clarified include identification of critical functions, resolution triggers, early warning indicators, and stress scenarios. - Introduce explicit powers for the resolution authority (in line with BRRD) to impose measures addressing impediments to resolvability (e.g., changes to business practices, structure, organization; segregation of critical functions into legally and operationally independent entities). - Ensure close coordination between prudential supervisor and resolution authority when exercising such powers. ### Crisis management readiness and simulations - Operational readiness: - Authorities are encouraged to conduct recurrent crisis-management simulations (e.g., on an annual basis) involving all public sector stakeholders and all components of the financial sector safety net. - Regional crisis management simulations leveraging Nordic-Baltic Coordination Group arrangements could be considered at lower frequency. - Rationale: recurrent simulations and meticulous evaluations help verify operational readiness as policies and procedures evolve post-BRRD transposition. ### Early intervention and supervisory framework - Role of intrusive supervision: minimize need for more drastic crisis-management tools by early, proactive intervention. - DFSA supervisory approach: - Highly risk-sensitive framework, strong responsibilities on Boards of Directors for prudent business models and effective risk controls. - Supervisory Diamond tracking five indicative ratios: sum of large exposures, lending growth, commercial real estate exposures, stable funding and excess liquidity coverage; threshold ratios defined and noncompliance published on DFSA’s website. - Annual update of firm-specific risk assessments, feeding into inspection program; stress tests are a key element. - Supervisory powers and ladder: - DFSA can require removal of a member of a bank’s Board of management if fitness and propriety criteria not met (Article 351 of the Financial Business Act), though fit-and-proper tests do not cover some key managerial positions such as chief risk officer. - Supervisory ladder stages: - Intensified surveillance and mandatory disclosure of risk information significant to banks, customers, depositors, other creditors, or financial market participants; - Detailed inspections by DFSA and analyses to be performed by bank management and signed-off by the external auditor (Article 349); - Corrective actions, followed—if not taken within time limit—by license withdrawal (Article 350). - Corrective actions can be initiated when depositors’ interests are at risk or there is a not insignificant risk of license loss. - DFSA can require a bank meeting minimum capital requirements but not individual (Pillar II) capital requirements to prepare a capital plan (capital raisings, reduction of RWA, sale of business, etc.); implementation closely monitored with typical restrictions on dividends or coupons. - DFSA ability to withdraw license if required capital actions not taken or minimum capital breached (Articles 225 and 124). - Inspection cycle limitation: - On-site inspections are comprehensive but extended examination schedules limit immediacy; for smaller firms, on-site verification can take up to six years absent off-site red flags. ### Crisis containment measures and past interventions - Principles: crisis tools should include arrangements for temporary official financial support, robust resolution powers for going-concern resolution, and orderly liquidation mechanisms for gone-concern. - 2008–2010 bank packages: - October 2008 (Bank Package I): - Two-year state guarantee covering all depositor claims and other unsecured creditors of banks domiciled in Denmark. - Establishment of the FSC as a state-owned winding-up company. - Financial sector contribution of DKK 25 billion (comprising DKK 15 billion in commissions for the state guarantee and a DKK 10 billion contribution to costs of winding up distressed firms). - Additional contribution of up to DKK 10 billion if FSC losses exceeded DKK 25 billion was provided for but not triggered. - The general state guarantee expired on September 30, 2010. - Estimates indicate Package I generated an upside of DKK 2.5 billion (difference between industry contribution DKK 25 billion and aggregate cost of winding-up distressed firms DKK 22.5 billion). - January 2009 (Bank Package II): - Capital support up to DKK 100 billion in hybrid instruments, allowing institutions to reach a Tier 1 capital ratio of 12 percent. - State-guaranteed debt issuances with maturity up to 3 years. - Applications for the recapitalization scheme could be submitted until June 30, 2009; guaranteed debt could be issued up to December 31, 2010. - When package expired, capital injections amounted to approximately DKK 46 billion distributed among 43 institutions; debt issuances of 50 institutions totaled DKK 193 billion. - As of January 2014, the aggregate windfall for the state of all Bank Packages was estimated at DKK 12.15 billion (about 0.8 percent of GDP). ### Emergency Liquidity Assistance (ELA) and central bank operations - DN (Danmarks Nationalbank) liquidity management: - Ordinary weekly market operations provide funding to eligible counterparties via collateralized loans; excess liquidity absorbed through sale of certificates of deposit. - Liquidity adjusting deposits and lending operations in DKK used to support fixed exchange rate policy when needed. - October 2011 exceptional measures: - Temporarily expanded collateral basis by accepting banks’ credit claims of good quality as collateral, resulting in an estimated increase of collateral of up to DKK 400 billion. - Introduced a long-term lending facility providing eligible counterparties with six-month variable-rate loans on a collateralized basis. - Exceptional measures were fully phased out as of July 1, 2014. - DN introduced a temporary three-year lending facility in parallel with ECB three-year operations, maturing in March and September of 2015. *Source: Excerpt from IMF technical note _cr14351 (Annexes and chapters as provided in the supplied content).* ### 26. Emergency liquidity assistance (ELA) is an essential supplement to regular ### Emergency liquidity assistance (ELA) is an essential supplement to regular ### ELA purpose and historical role - ELA entails the provision of liquidity to mitigate sudden funding pressures that could, if not addressed, undermine financial stability. - Under exceptional circumstances, providing ELA may prevent illiquidity at one or more banks from triggering a systemic loss of confidence that spreads to otherwise healthy institutions. - During past crises, ELA has proved indispensible to prevent contagion and avoid systemic distress. ### Strengthening the ELA framework - DN’s ability to provide ELA is derived from its broadly formulated mandate to “maintain a safe and secure currency system [...] and to facilitate and regulate the traffic in money and the extension of credit.” - DN has provided ELA on three separate occasions, lastly in 2008, in each case backed by loss guarantees. - Authorities are encouraged to strengthen the framework to expressly provide for the DN’s power to grant ELA to solvent but temporary illiquid institutions, subject to adequate collateral. - Preparation of internal guidelines and action plans is highly beneficial, including codifying: - Eligible counterparties; - Arrangements for prompt decision-making; - Assets that the DN would accept as collateral (presuming that collateral for regular refinancing operations will already have been exhausted); - Guidance on pricing and maturity; and - Additional conditions that may be imposed on the recipient bank (for example, requirements to reduce its balance sheet, enhanced reporting requirements). ### DN–DFSA coordination on ELA - Coordination arrangements between the DN and the DFSA pertaining to ELA should be made explicit. - Such arrangements should cover: - Consultation of the DFSA by the DN at the time of the ELA request; and - Coordination and information exchange following the provision of ELA. - To reduce prospect of losses for the DN, ELA recipients should be subjected to intensified supervision—possibly involving continuous on-site presence of DFSA staff—with prompt supervisory action if the recipient bank shows (continued) signs of distress. - Such coordination could possibly be formalized by expanding the scope of the current MoU signed between the DN and the DFSA. ### Disclosure considerations for ELA - Benefits of disclosing ELA operations should be carefully weighed against financial stability considerations. - DN’s participation in ELA operations has been described in its Annual Report and Quarterly Monetary Reviews; disclosure obligations applicable to recipient banks may require banks to issue press releases. - Financial stability considerations may justify flexibility in both the timing and content of disclosures pertaining to ELA operations. - To the extent necessary, provisions governing disclosure should be changed to allow for such flexibility (possibly, as far as supervised institutions are concerned, subject to prior notification of DFSA). ### Overview of the Danish resolution regime (small- and medium-size firms) - The resolution scheme introduced in October 2010 (Bank Package III) allows orderly winding up by transferring distressed bank assets and part of liabilities to FSC subsidiaries (bridge banks) or third-party acquirers, while winding up the rest through ordinary liquidation. - The scheme allows FSC to allocate losses to shareholders and holders of subordinated debt by leaving their claims behind in the entity to be liquidated. - The process is “initiated” by the DFSA if the bank in distress does not meet capital requirements within the deadline set by the DFSA. ### Steps in a bank resolution under the scheme - Decision to use the scheme: activated via a notification from the management of the distressed bank requesting winding-up under the scheme if private sector solutions fail. - Asset review: FSC conducts a preliminary review to determine minimum realizable value (excluding goodwill); preliminary transfer value comprises estimated realizable values; bank management can continue to pursue private solutions during valuation. - Split of the distressed bank: - Assets transferred to a licensed FSC subsidiary (“new bank”) which pays by taking over a proportional share of nonsubordinated liabilities. - Insured deposits suffer no losses (DGS resources used if necessary); other unsecured senior creditors face haircuts (bail-in). - Equity holders and subordinated creditors remain with the residual entity. - “New bank” disposal: - FSC injects capital and liquidity into the new bank and gradually sells transferred assets to third parties, aiming to avoid fire sales. - Any losses incurred by the FSC are absorbed by the banking industry via loss guarantees provided by DGS’ Winding-up and Financial Reconstruction Department. - The license of the distressed bank is eventually revoked by the DFSA. - Final compensation: Final asset value is determined by two independent auditors; depending on valuation, an additional dividend may be available to nonsecured creditors. ### Legal powers, triggers, and suggested enhancements - The DFSA does not have explicit legal power to compel a failing bank to enter resolution; resolution can occur only if the failing bank’s Board agrees to transfer assets and part of liabilities to the FSC. - The Board of a failing bank has strong incentives to enter resolution rather than bankruptcy due to liability for increased losses; procedures apply notwithstanding bank articles of association. - Current legal trigger: breach of capital requirement and non-adherence following a compliance notice by the DFSA leads to resolution. (Article 246 (1) of the Financial Business Act prescribes the breach of the capital adequacy as a quantitative trigger for resolution.) - Authorities are encouraged to provide additional quantitative (objective) and qualitative (subjective and more flexible) resolution triggers to allow use of resolution powers before a firm is balance-sheet insolvent and before all equity has been fully wiped out. - There should be clear standards or suitable indicators of non-viability to guide entry-into-resolution decisions. ### Expanding the resolution toolkit - Consider enshrining additional resolution tools in law, including: - Forced recapitalization and merger; - Appointment of an official administrator to try to restore the bank or part of its activities into viability. - In addition to current ability of FSC to allocate losses to shareholders and subordinated debt, the FSC (or designated resolution authority) should have power to impose mandatory debt restructuring (bail-in) in a “going concern” resolution by writing down liabilities and/or converting them to equity. - For the bail-in tool to be effective, it is necessary to have sufficient debts capable of being bailed-in at the time of resolution. ### Legal amendments to enhance effectiveness - Include resolution authority’s right to remove the failing bank’s management (in addition to DFSA’s early intervention right to remove an “unfit” member of the bank’s Board (Article 351 (3) of the Financial Business Act)). - Grant resolution authority powers to temporarily impose moratoria and stays on contractual rights (acceleration, early termination, set-off, netting) that counterparties could trigger once a bank enters resolution. Current regime does not grant DFSA or FSC such powers. - Resolution authority should have powers similar to management’s current ability to override shareholders’ rights, and these powers should be enforceable when imposing other resolution tools to avoid shareholders blocking resolution transactions. ### Official administration (public control) - DFSA can replace Directors who do not comply with “fit-and-proper” criteria, but law is silent on DFSA’s ability to appoint “official administrators” to take control and manage affected firms. - Official administrators would: - Assume legal powers of the Board of Directors and shareholders; - Effectively replace Directors and managers; - Assess the financial situation, design and implement rehabilitation plans using resolution tools where possible, and prepare liquidation where impossible. - BRRD envisages introduction of these administrators to temporarily replace bank management, or oversee bank management via pre-approval rights for specific decisions (Article 29 of Directive 2014/59/EU). ### Powers and uses of official administrators - Administrators require a broad suite of powers, including vetoing decisions of corporate bodies, executive managerial powers, revoking prior management decisions, convening general meetings, or taking over powers of shareholders when necessary. - Administrators are accountable to the resolution authority, which typically provides strategic guidance and/or pre-approval of certain strategic decisions. - Official administration can facilitate resolution planning by providing unfettered access to information to evaluate bank condition, asset quality, susceptibility to further losses, and prepare bid packages and marketing strategy—while maintaining confidentiality to avoid eroding public confidence. ### Alignment with BRRD and implementation timing - Recommendations align with the BRRD. Mandatory transposition of the Directive by January 1, 2015 allows Danish authorities to strengthen the resolution regime. - Authorities indicated they are in the process of implementing the new BRRD, which will introduce major changes to the current resolution regime. ### Legal remedies and court constraints - Legal remedies should not constrain implementation of, or result in reversal of, measures taken by resolution authorities acting within legal powers and in good faith. - Law does not explicitly limit courts’ remedies to monetary damages; courts could potentially halt implementation or unwind executed transactions (e.g., transfer of assets and liabilities). - Decisions of the DFSA to remove bank Directors based on “fit-and-proper” criteria could be challenged in court, potentially enabling such Director to retain position during proceedings, which could negatively affect decision-making and bank reputation. - Valuation of a bank following transfer to FSC or third party acquirer under the resolution regime can be tested in court via lawsuit initiated within no later than three months after receiving such valuation. - Targeted legal amendments are necessary to limit scope of legal remedies to monetary compensation, subject to “no creditor worse off than in liquidation” test. ### Funding of firms in resolution - Funding arrangements are essential to implement resolution strategies, including providing liquidity to firms under liquidation, bridge banks, or asset management companies; capitalizing bridge banks; and contributing resources to facilitate transfer of (insured) deposits (subject to a “least cost” test). - The banking industry, rather than the taxpayer, should ultimately shoulder the burden of resolution. - Two stylized funding options: - Creation of resolution funds, financed via ex ante contributions from the industry (similar to many DGS); and - Use of public resources, with the ability to recoup any outlays from the industry on an ex post basis. *Source: IMF staff analysis in chapter on Denmark contained in the provided PDF content unit.* ### 42. The Danish resolution scheme comprises a mix of public and private funding ### 42. The Danish resolution scheme comprises a mix of public and private funding ### Funding mix and current arrangements - The Banking Department of the DGS, which benefits from ex ante financing, can contribute resources to resolution actions (subject to certain restrictions) under Bank Package IV. - Loss guarantees that the FSC receives from the DGS’ Winding-up Department de facto allow for the allocation of losses to the industry on an ex post basis. - The FSC has unlimited access to the Danish government’s re-lending facility,39 allowing the FSC to raise loans directly from the government, with the terms and conditions mirroring those of (domestic) government bonds.40 - Using the re-lending facility, the FSC can mobilize resources to provide capital and liquidity to its subsidiaries; as the unwinding of the acquired assets and liabilities progresses, excess capital and liquidity is returned to the government via reimbursement of the loans. ### Recommendation: consolidate funding arrangements via a robust resolution fund - Authorities are recommended to consolidate funding arrangements via a robust resolution fund. - In line with BRRD requirements, the fund should: - be gradually built up via industry contributions; - have the power to impose extraordinary contributions on the industry; and - benefit from a robust public backstop, to be tapped where available resources are insufficient to meet financing needs associated with resolution actions. - The fund’s target level and industry contributions should be carefully determined, taking into account potential outlays (factoring in the characteristics of the financial sector).41 - Given the size of the Danish banking system in comparison to GDP, the authorities may want to set a target level that exceeds the minimum requirement under the BRRD of 1 percent of the covered deposits for the entire banking system. - To incentivize institutions to reduce their contribution to systemic risk, contributions should eventually be risk-adjusted, but setting a flat rate for the first few years would ease implementation. - To avoid overburdening the banking system, a reasonable phase-in period (e.g., 5 to 10 years) will be required. - One potential benchmark for “rightsizing” a resolution fund—the average fiscal cost of government interventions during the financial crisis, net of recoveries, for advanced G-20 countries—points to a financing need of just below 3 percent of GDP.41 ### Bank liquidation and insolvency: legal framework and gaps - Banks and MCIs are not excluded from ordinary insolvency proceedings under the Danish Bankruptcy Act; a debtor is considered insolvent when it is unable to meet its liabilities as they become due, unless its inability to pay is deemed temporary.42 - The Financial Business Act provides derogating provisions for banks and MCIs because banks require earlier intervention than ordinary insolvency timing. - Amended insolvency definition: banks are considered insolvent when they are unable to meet their obligations regarding subordinated capital taken up as hybrid core capital or subordinated loan capital, providing an earlier threshold for placing a bank under liquidation. - Appointment of bankruptcy trustee: the law provides for prior consultation of the DFSA before the bankruptcy trustee is appointed by the bankruptcy court; while de jure the DFSA’s opinion is not binding, it has always been taken into consideration—something the mission recommends enshrining in the law.43 - Transfers to the FSC: bankruptcy trustees of banks are empowered to enter into an agreement to transfer all the assets and part of the liabilities of the bankrupt bank to the FSC by applying mutatis mutandis the resolution measures under Bank Package III.44 - Strengthening recommended: supervisory and resolution authorities should have special powers to coordinate with bankruptcy courts and trustees, providing trustees with necessary details, guidance, and recommendations on liquidations to ensure informed decisions and awareness of potential acquirers. ### Creditor hierarchy and depositor preference - Current legislation does not provide depositors with preferential claims on the assets of a failed bank: all creditors, including insured depositors, rank pari passu with other unsecured creditors under the Bankruptcy Act.45 - The DGS law includes the right of subrogation for the DGS when payouts are made to eligible depositors; however, the DGS is treated like other creditors. - Advantages of introducing depositor preference: - Preferential treatment for “eligible” depositors reduces the likelihood of depositor losses and enhances depositor confidence. - Depositor preference, combined with subrogation of insured depositors’ rights to the DGS upon reimbursement, can help reduce the costs of resolution for the DGS and maximize recoveries on the assets of the failed bank. - Depositor preference could help avoid legal challenges from unsecured creditors by establishing clear legal grounds for preferential treatment, facilitating resolution techniques such as transfers of deposits. - Larger loss exposure for unsecured creditors may maximize market discipline by incentivizing closer monitoring of banks’ risk-taking. - Potential drawbacks: - Depositor preference may negatively impact bank funding costs or the availability of unsecured wholesale funding. - For depositor preference to be effective, there must be sufficient unsecured liabilities to absorb the bank’s losses. - Forms of depositor preference described (Box 5): - Insured depositor preference: preferential treatment for insured depositors (and the DGS through subrogation); uninsured deposits rank pari passu with senior unsecured creditors. - General depositor preference: preferential status to all deposits, including those above the DGS’ insurance limit; the DGS is subrogated for insured deposits and ranks pari passu with uninsured depositors. - Tiered depositor preference: prefers insured deposits (and the DGS through subrogation) over uninsured deposits, and prefers both over senior unsecured creditors. - The BRRD provides for preferential treatment of deposits in insolvency proceedings in the form of tiered depositor preference: - (i) covered deposits and the DGS (subrogated to the rights and obligations of covered depositors in insolvency proceedings) are given priority on the assets of the failing bank; and - (ii) subsequently, eligible deposits from natural persons and micro, small, and medium-sized enterprises which exceed the coverage level are given priority over claims of ordinary unsecured, non-preferred creditors. - Cross-border coordination implications: material differences in creditor hierarchy between home and host countries may negatively affect cross-border cooperation in bank resolution; territorial limits on depositor preference could prompt ring-fencing measures by host authorities. ### Mortgage Credit Institutions (MCIs): liquidation and alternatives - Current legislation provides important safeguards for the orderly liquidation of MCIs: MCIs have no depositors warranting immediate protection and, per the Mortgage-Credit Act, a bankruptcy order does not give rise to early repayment of the bonds and derivative contracts,46 making MCIs hardened against runs. - Legal provisions assume continued performance of the MCI’s obligations by a liquidator, with winding-up in accordance with the repayment schedule of the underlying mortgage loans. - The Mortgage-Credit Act provides the liquidator with the ability to: - raise additional loans (e.g., via issuance of junior covered bonds secured by the asset pool but subordinated to other bonds), - refinance maturing bonds, and - provide additional collateral (e.g., where adverse movements in collateral value trigger a need for supplementary collateral).47 - Amendments on mandatory maturity extension: allow extension of the maturities of the bonds by one year if (a) there is insufficient demand or (b) interest rates increase by more than 5 percentage points; if an auction fails in bankruptcy, bonds will be altered to a long-dated, fixed-rate instrument with term and installments corresponding with the underlying mortgage.48 - Notwithstanding the legal possibility of a gradual winding-up, authorities should contemplate alternatives for distressed MCIs, including early intervention powers such as transfer of covered pools and affiliated bonds to a healthy institution or a bridge bank, and appointment of an official administrator. - Rationale: - The Danish covered bond market is highly concentrated, with the two largest MCIs accounting for more than 70 percent; distress of one MCI can spill over to others. - Failure of a larger MCI will significantly impact the availability of mortgage financing; resolution should be geared toward going-concern solutions.49 - Activation of mandatory maturity extensions may have pro-cyclical effects, potentially triggering price declines as investors attempt to exit before extensions are activated, affecting institutions holding similar bonds.50 - Winding up the covered pool per underlying loan schedules assumes the liquidator can maintain servicing capabilities over a prolonged period despite operational risks and staffing incentives to leave, increasing liquidation costs. ### Deposit Guarantee Scheme (DGS): structure and role in resolution - The Danish DGS is organized as a private, self-governing institution established by an act of parliament and subject to supervision by the Danish FSA. - The DGS gravitates around the Guarantee Fund for Depositors and Investors (the ‘DGS’) providing financial coverage to depositors and investors of all Danish banks, MCIs, and investment companies. - The legal framework comprises the Guarantee Fund for Depositors and Investors Act (DGS Act), as lastly amended in June, 2013, and Executive Order no. 679 of November 13, 2013, implementing the EU DGS Directives.51 - The DGS is mandated to cover losses to depositors and investors in case of financial reconstruction or bankruptcy, and participates in the winding-up of failing banks under the Financial Stability Act. - Box 6 — Roles of the Guarantee Fund for Depositors and Investors in resolution matters: - In liquidation: eligible deposits receive coverage from the DGS Banking Department up to the insured amount of €100,000, with claims calculated after deduction of obligations to the relevant institution; a limited number of ‘special’ deposits are covered in full. - Under Bank Package III resolution: a proportionate share of insured deposits, equal to the proportion of other nonsubordinated liabilities that were transferred, is transferred to the FSC subsidiary; the FSC subsidiary supplements accounts of insured depositors up to the insurance cap, and the subsidiary is subrogated to the depositor’s claims against the GF. - Winding-up and Restructuring Department: funded via undrawn commitments provided by the Danish banks, participates in winding up distressed banks by providing loss guarantees to the FSC covering any losses that may arise from the resolution; has issued loss guarantees for Amagerbanken (2011), Fjordbank Mors (2011), Max Bank (2011), and Sparebank Østjylland (2012). - Bank Package IV: since June 2011 the Banking Department of the DGS can provide financial support to a third-party acquirer of a distressed bank; decision rests with the DGS’s Board of Directors and is granted if it results in smaller outlays for the DGS than a ‘traditional’ resolution under Bank Package III and the acquisition is commercially viable; compensation has been provided for Max Bank (2011), Sparebank Østjylland (2012; both Bank Package IV), and Spar Salling Sparrekasse (2012; Bank Package III). *Source: _cr14351 - 42. The Danish resolution scheme comprises a mix of public and private funding* ### 52. Membership of the DGS is compulsory for all banks and MCIs operating in ### Membership of the DGS is compulsory for all banks and MCIs operating in Denmark ### Coverage and membership - Membership of the DGS is compulsory for all banks and MCIs operating in Denmark. - At end-2013, the DGS comprised 150 institutions, including 99 banks and seven MCIs. - In line with the EU DGS Directives: - Deposits held at Danish branches of banks headquartered in other member states are covered by the DGS of the home state. - DGS protection extends to deposits held at branches of banks from third countries. - Coverage is provided up to €100,000 (approximately DKK 745,000), albeit with certain exceptions. - At end-September 2013, net covered deposits amounted to about DKK 845 billion, approximately 43 percent of total deposits. ### Exclusions and full coverage exceptions - Excluded from coverage: - Deposits belonging to directors of the respective institution. - Subordinated debt. - Deposits originating from transactions that are subject to a judgment concerning money laundering. - Deposits covered in full, without application of the €100,000 cap or deduction of any loans or other liabilities, include: - Savings schemes established by law—such as lump-sum—and installment pension accounts. - Children’s savings accounts. - Home savings contracts. - Educational savings accounts. - (Temporary) deposits that relate to the purchase of noncommercial real estate for a period up to nine months from the deposit. ### Offsetting depositor claims (findings and recommendation) - Current practice: Under the DGS Act, depositors’ claims for coverage are calculated after deduction of any obligations to the relevant institution. - Concerns: - Offsetting depositor claims against financial obligations to the failed firm can hinder timely reimbursements and cause hardship for depositors whose loans are in good standing. - Recommendation: - Limit offsetting of insured deposits, at maximum with loans that are past due. - Limiting offsetting (as per the recast DGS Directive) will help increase the base for calculating industry contributions and thus allow for a stronger funding base of the DGS. ### Governance (findings and recommendations) - Current governance structure: - DGS is managed by a Board of Directors whose members are appointed by the MoBG for a period of 3 years. - Four out of the eight Board members, including the chairman and deputy chairman, are independent. - Four Board members are industry representatives: two representing banks, one representing MCIs, and one representing investment firms. - Board meeting conflict-of-interest safeguard: Board members (and their spouses and other relatives) with a personal or economic interest are precluded from participating in Board meetings on the relevant case. - Concerns: - Inclusion of industry representatives may limit opportunities for early engagement between the DGS and other public stakeholders in case of mounting distress in individual institutions. - Current governance could jeopardize institutional independence and allow undue political and industry influence. - Recommendations to strengthen independence and accountability: - Consider removal of industry representatives from the DGS’s Board while introducing an oversight body to strengthen ex post accountability and maintain industry representation. - Introduce fit-and-proper criteria for all Board members. - Explicitly state reasons for early removal from office of Board members in legislation, with mandatory disclosure of such reasons in individual cases. - Introduce legal protection covering the DGS, its Board members, and its staff for decisions and actions taken in good faith while discharging their duties. ### Funding (findings, reforms, and recommendations) - Prior arrangement: - Up to March 2012, financing of the DGS was organized on the basis of ex post loss sharing, with member banks contributing based on each bank’s share of total covered net deposits. - Risks of sole reliance on ex post contributions: moral hazard, procyclicality, potential large costs imposed on the banking system when resilience is already eroded. - Reform under Bank Package IV: - Move toward an ex ante financed system with a target fund of 1 percent of covered net deposits (amounting to, approximately, DKK 8 billion). - Annual contribution set at 0.25 percent of net covered deposits. - DGS’s Board has the right to increase contributions as an extraordinary measure; the DFSA can (after consultation with the DN) mandate such an increase. - Board required to maintain liquid assets and loan commitments up to, at least, 0.75 percent of covered net deposits, deposited in an account at the DN. - Remaining needs: - Efforts to build up resources remain important, particularly in light of the recommended limitation of offsetting practices (which points to a higher funding target). - Backstop and borrowing arrangements: - Current legislation envisages two alternative funding sources in addition to increasing annual contributions: - Departments may borrow an amount up to 50 percent of the required amount of cash resources of the other departments, subject to a maximum of DKK 100 million per department in a single financial year. - The DGS may raise loans in the market against a guarantee provided by the Danish state (subject to the approval of the state’s Finance Committee). - Concerns: these arrangements may prove insufficient at times of severe stress and may have adverse signaling effects. - Recommendation: consider providing the DGS with an unsecured credit line from the MoF (with funds to be made available by the DN) that could be drawn down immediately. ### Reimbursements (timing, preparedness, and recommendations) - Current maximum reimbursement period: - DGS Act prescribes a maximum reimbursement period of 20 business days after commencement of financial restructuring or bankruptcy proceedings, with the possibility to extend this period with another 10 business days. - This is in line with current EU DGS Directives. - Concerns: - A reimbursement period of 20 (30) days may give rise to financial difficulties for depositors who could temporarily lose access to their funds. - Recommendation: - Consider a shorter maximum payout period (the recast DGS Directive adopted by the EU parliament in April 2014 mandates a shorter period). - Past experiences resolving distressed institutions over one weekend suggest banks can deliver necessary information for prompt payouts within a very short timeframe. - Operational readiness and advance preparation: - Reimbursing depositors requires: - Robust infrastructure and clear legal authority for the DGS to direct banks to submit accurate depositor records. - Strategies and approaches for handling depositor records. - Coordination protocols with other safety net players and service suppliers, and clear policies, controls, and authorities within the DGS governance structure. - Certain preparatory activities can improve operational readiness and allow for quicker reimbursements. - Note: Danish practice of resolving distressed banks via transfer of assets and part of liabilities often ensures insured depositors retain continuous access to their funds, making traditional payouts redundant in many cases; nevertheless, timely payout capabilities should be maintained as a credible alternative. ### Legal protection (findings and recommendations) - Recommendation: Danish supervisory and resolution authorities and their staff should have legal protection against liability for actions taken in good faith while performing their duties. - Rationale: shield authorities from lawsuits that could affect judgment or lead to leniency. - Consideration: introduce legal amendments that limit liability to cases excluding gross negligence or willful misconduct. - If employees are subject to personal lawsuits, they should have a statutory right to be indemnified for costs and expenses incurred in defending themselves. - Administrators, liquidation trustees, and the DGS: - Should enjoy legal protection for actions taken in good faith while discharging their duties. - Directors of institutions under resolution: - Authorities are encouraged to grant firm management statutory protection against possible liability for actions taken when complying with decisions of the resolution authority, limited to implementing measures decided by the resolution authority. - Such protection should not discharge management for actions (or non-actions) taken prior to initiation of resolution proceedings where those actions contributed to distress. ### Annex highlights (selected figures and Bank Packages) - Annex I: Since 2008, 12 Danish banks have been taken over by the FSC under one of the Bank Packages. - At end-December 2013, residual exposures of the FSC for winding-up FSC amounted to approximately DKK 16.5 billion, largely consisting of customer deposits (DKK 12.8 billion). - Selected Bank Packages: - Bank Package I (October 2008): sector covered losses up to DKK 35 billion (2 percent of GDP). - Bank Package II (January 2009): banks drew DKK 46 billion (around 3 percent of GDP) in solvency support and DKK 193 billion (12.5 percent of GDP) in state-guaranteed debt instruments. - Bank Package III (October 2010): haircut for unsecured (and uninsured) creditors including depositors above DKK 750,000 (EUR 100,000). - Bank Package IV (September 2011): introduced annual fixed payments to strengthen the funding structure of the Danish Guarantee Fund for Depositors and Investors. - Bank Package V (March 2012): included sale of real estate loans from FIH Erhversvbank to the FSC backed by an unlimited loss guarantee. - Bank Package VI (October 2013): introduced more stringent solvency and liquidity requirements for systemically important banks and mortgage credit institutions. *Source: IMF staff report content provided in the supplied document.* --- _Source: https://www.imf.org/-/media/websites/imf/imported-full-text-pdf/external/pubs/ft/scr/2014/_cr14351.pdf_