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Europaudvalget 2010-11 (1. samling)
EUU Alm.del Bilag 296
Offentligt

MINISTER FOR ECONOMIC

European Commission

DG Internal Market and Services

Rue de Spa 2

B-1049 Brussels

Belgium

AND BUSINESS AFFAIRS

MINISTRY OF ECONOMIC

Commission consultation on technical details of a possible EU

framework for bank recovery and resolution

To the European Commission

AND BUSINESS AFFAIRS

Slotsholmsgade 10-12

DK-1216 Copenhagen K

Tel.

+45 33 92 33 50

+45 33 12 37 78

General remarks

The financial crisis has shown that dealing with distressed credit institu-

tions is a major challenge. Across Europe different rescue packages and

resolution schemes have been put in place to ensure financial stability.

The importance of an effective crisis management system is now being

addressed by the Commission to ensure sufficient schemes in all member

states to cope with distressed credit institutions in the future.

We strongly support this initiative since a harmonised resolution ap-

proach which covers all member states is required in order to ensure a

level playing field in the EU. The current situation with various ad hoc

solutions across member states hampers transparency and market effi-

ciency.

Denmark has already established a credible resolution regime providing

for an orderly wind-up of distressed banks having dismantled a general

state guarantee and put in place a resolution scheme in autumn 2010. The

objective of the resolution scheme is to safeguard financial stability and

to minimise economic losses when a bank becomes unable to meet the

statutory capital requirements.

The new scheme allows for potential losses to senior creditors and depos-

itors as well as shareholders and subordinated debt while maintaining a

going-concern organisation. The resolution mechanism creates incentives

for holders of large deposits and other non-deposit creditors to monitor

banks. By reducing the risk appetite of banks the mechanism leads to a

sounder financial system.

The new scheme was tested for the first time during the weekend of 4-6

February 2011 when Amagerbanken A/S was taken over by the Danish

Fax

CVR no. 10 09 24 85

[email protected]

www.oem.dk

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Financial Stability Company. Creditors including depositors whose net

deposits with Amagerbanken A/S are in excess of EUR 100.000 must an-

ticipate immediate losses of approximately 41 per cent as the bank is liq-

uidated (for further information see annex II). Customers normal banking

business (e.g. use of credit cards, debtor cards etc.) were not affected. The

bank opened as usual Monday morning with no apparent difference for

the customers, who can still conduct normal banking business.

Market reactions have been limited towards the functioning of the Danish

resolution mechanism and how it was used on Amagerbanken A/S. How-

ever, recently the long term ratings of banks incorporated in Denmark

have been downgraded by Moody’s as they lowered their assessment of

the likelihood of future public support and, hence, the systemic support

uplift they had applied previously. This rating action was initiated after

the Danish resolution regime was used for the first time on Amagerbank-

en A/S.

As a consequence we see the creation of more uniform resolution

schemes across the EU as crucial in ensuring an effective single market in

banking. The Danish scheme - which is broadly in line with the principles

in the Commissions consultation document - shows that it is possible to

take rapid and decisive action in order to wind-up failing banks and avoid

contagion to the general banking system.

Central issues

Five general points on central issues are raised in the following. Please

find our detailed comments to specific sections in annex I.

Scope

As for the scope of the resolution regime we agree that the regime should

cover all credit institutions. However, there should be a measure of pro-

portionality in relation to smaller financial institutions with no cross bor-

der activities in order to avoid excessive administrative burdens. Fur-

thermore, we support the work by the Commission in considering which

crisis management arrangements might be necessary for other types of

financial institution.

Furthermore, it should be pointed out that the Danish legislative frame-

work offers an alternative to ordinary liquidation. For the system not to

be expropriatory and conflict with fundamental principles it is voluntary

for the credit institution which can always choose a normal insolvency

procedure. We believe that the same approach should be taken at EU lev-

el.

Asset transfers

We support further work on a European framework on asset transfers to

support financial stability and to prevent and mitigate financial crisis sit-

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uations while at the same time assuring legal certainty and minimizing

contagion risk between companies in a group.

However, transfer of assets intra-group can contain a risk of contagion

(abuse of a dominant position). Our statutory practice to prevent conta-

gion requires a prior permission from the supervisor to the financial insti-

tution before transfer of assets (exposures) upwards and side wards in a

group is allowed. Recent experiences have illustrated the usefulness of a

regime requiring prior supervisory approval of intra-group exposures in

avoiding contagion. Avoiding contagion is in our opinion as important as

facilitating intra-group financial support. This is especially the case as

long as there is no effective cross border crisis resolution framework in

the EU and no agreement on possible burden sharing among member

states in crisis situations. Until an effective cross border recovery and

resolution framework is in place it is very important for us to be able to

maintain these tools.

Debt write down

A transparent and credible possibility of debt write down will be neces-

sary to ensure that creditors of especially large credit institutions will do a

thorough analysis of the credit risk before lending to a credit institution.

The financial crisis showed that the possibility of losses for shareholders

was not sufficient to discipline the behaviour of credit institutions. There-

fore broader measures are needed such as the possibility of debt write

down. In addition it is also necessary to ensure resolution of a credit insti-

tution without government intervention. With a debt write down the cred-

it institution can continue its business to the benefit of the economy.

The comprehensive approach is preferred since it is at least as attractive

as the alternative (i.e. liquidation) to creditors. This is important because

otherwise there will be creditors who would have been better off in a liq-

uidation process and consequently hold the management or the resolution

authority responsible for their loss. Furthermore, this approach works in

all circumstances since - contrary to the targeted approach - there is no

upper limit to the write down.

It should be noted that if a debt write down applies to shares or existing

debt issued before entry into force of the power such write down could be

expropriatory and a compensation mechanism would be necessary.

Finally, we find that there must be no doubt that holders of covered bonds

and junior covered bonds always will receive timely payment. Holders of

covered bonds shall according to CRD and UCITS benefit from a privi-

leged status in case of bankruptcy and holders of junior covered bonds do

also benefit from such a status. It should therefore be made clear that

covered bonds and junior covered bonds should not be subject to debt

write down.

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Financing

We strongly support that member states should be able to meet financing

requirements for the resolution regimes through the existing structure of

the deposit guarantee schemes in order to exploit synergies. The compati-

bility of such an approach with staid aid rules should be made clear.

As for the target size and the phasing in of the fund it is necessary to take

into account the various other regulatory initiatives under way, e.g. capi-

tal and liquidity requirements, as well as the revision of the directive on

deposit guarantee schemes. Too strict financing requirements in the new

resolution regime may risk affecting the real economy in member states.

Furthermore, an appropriate balance between ex ante and ex post financ-

ing is necessary.

Derogations from basic legal principles

Derogations from national basic legal principles cause uncertainty and

reduce transparency. Derogations should therefore be avoided or limited

to the largest extend possible. This applies to company law, bankruptcy

law and general principles of liability and judicial recourse. Especially

derogations from national bankruptcy law may cause uncertainty and lack

of transparency which can have a negative impact on the credit institu-

tion’s funding possibilities. This is not in the interest of financial stability

and such derogations should therefore be considered very carefully.

Yours sincerely,

Brian Mikkelsen

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Annex I: Detailed comments

Scope of preparatory and preventive measures and resolution tools

(Part 1)

As for the scope of the resolution regime we agree that the regime should

cover all credit institutions. However, there should be a measure of pro-

portionality in relation to smaller financial institutions with no cross bor-

der activities in order to avoid excessive administrative burdens. Fur-

thermore, we support the work by the Commission in considering which

crisis management arrangements might be necessary for other types of

financial institution.

Authorities responsible for resolution (Part 1 – question box 3)

We support that the designation of the administrative authority to apply

the resolution tools and exercise the resolution powers should be left to

national discretion. Some member states already have different kinds of

frameworks and it should be possible to build upon these.

As long as the credit institution fulfils the capital requirements we find

that the main responsibility should stay with the supervisor. This implies

that some of the responsibility for the resolution plan rests within the su-

pervisor and not with the resolution authority.

Furthermore, it should be considered if it is possible to create a clearer

distinction between “living credit institutions” and "near death credit in-

stitutions", where the supervisor has set a deadline for the fulfilment of

the capital requirement. As long as the credit institution is a “living credit

institution” the responsibility for the institution rests with the supervisors.

The resolution authority needs to get involved if the credit institution is a

“near death credit institution”.

That is also the approach in the Danish framework where the Financial

Stability Company takes over the “near death credit institution” meaning

an institution which no longer fulfils the capital requirements and where

the supervisor may revoke the license.

Supervision (Part 2.A. – question box 4)

In general we welcome a reinforcement of the supervisory regime with

regard to supervisory planning and forward looking risk assessment.

Stress testing is a key management tool in financial institutions and

should be well-integrated. It is also a very useful supervisory tool among

others. We believe stress tests should be conducted both by supervisors

and by all financial institutions on a frequent basis. Stress testing by su-

pervisors allows for a cross-sectoral view of the resilience in financial

institutions and is a backbone in the supervisory review evaluation pro-

cess and dialogue. Institutions must observe and incorporate stress test

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requirements in a proportionate manner to reflect the nature, scale and

complexity of the activities.

We welcome further convergence at EU level on the general principles of

national stress testing exercises. However, it is important to leave a room

for national discretion as regards the sample, scope and relevant macroe-

conomic scenarios. We see merits in closer cooperation on stress testing

within supervisory colleges.

We acknowledge that occasional disclosure of stress test results in rela-

tion to individual financial institutions can be a possibility under extraor-

dinary circumstances as disclosure might contribute to restore confidence

in financial markets. Proper back stops mechanisms, i.e. effective resolu-

tion frameworks, must be in place and communicated to the market if

stress test results are disclosed.

Recovery planning (Part 2.B. – question box 7)

It is proposed that credit institutions should develop and maintain recov-

ery plans detailing how an institution and its activities might be disman-

tled and wound up rapidly and in an orderly manner.

We agree that recovery plans could be developed subject to proportionali-

ty principles and a careful assessment of the costs and benefits. It should

be noted that the recovery plan may not be exhaustive in a crisis situation.

Furthermore we find that the need for group recovery plans should be fur-

ther assessed. The entity specific recovery plan might be sufficient to

make an assessment of the group recovery plan.

We support that the management of the financial institution shall take all

necessary steps to avoid financial difficulties. There must be no doubt

that this is the responsibility of the management. The management must

make its decision after collecting all necessary updated and available in-

formation. However, it shall not be sufficient automatically to fall back

on previously adopted policies and recovery plans even if these may be

included in the box of instruments that the management will look to in

case of financial difficulties or crises.

Generally lack of responsibility increases the risk of moral hazard. There-

fore the management of the institution should not by regulation be re-

leased from its responsibility and certainly not on the grounds that the

management simply has followed the previously adopted policies and

plans.

Intra-group financial support (Part 2.C. – question box 9-17)

We support further work on a European framework on asset transfers to

support financial stability and to prevent and mitigate financial crisis sit-

uations while at the same time assuring legal certainty and minimizing

contagion risk between companies in a group. There is a need to look into

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best practices on how to regulate intra-group exposures and transactions.

In some situations transfer of assets should be limited and in other situa-

tions transfer of assets should be encouraged.

Distinct and clear liabilities on each financial institution in a group will

contribute to transparency. Introducing intra-group liability may have ad-

vantages in some situations but will cause uncertainty and reduce trans-

parency in other situations. This applies both to groups that operate na-

tionally and across borders.

Transfer of assets intra-group always contains a risk of contagion (abuse

of a dominant position). Our statutory practice to prevent contagion re-

quires a prior permission from the supervisor to the financial institution

before transfer of assets (exposures) upwards and side wards in a group is

allowed. Generally intra-group exposures will be accepted by the super-

visor up to a limit of 25 per cent of the capital requirement plus the

amount of surplus capital of the lender. The supervisor may raise or lower

this limit based on an individual evaluation of the risk. In addition all

intra-group transactions (including exposures) must be based on market

terms.

Recent experiences (also during the financial crisis) have in our opinion

illustrated the usefulness of a regime requiring prior supervisory approval

of intra-group exposures in avoiding contagion. Avoiding contagion is in

our opinion at least as important as facilitating intra-group financial sup-

port. Therefore, it is very important for us to be able to maintain these

national requirements and we suggest that a future EU framework for

bank recovery and resolution should be inspired by this regime.

On a specific note we find it necessary and crucial that the entity specific

authority has the power to refuse transfer of assets to other entities in the

group. The decision from the entity specific authority must be based on

good and justified grounds. It will be in contradiction with general legal

principles (legal entities are responsible for own debt) in Denmark to in-

troduce the concept of group interest and we are not convinced that the

advantages hereof will exceed the disadvantages.

Furthermore, as mentioned in the general comments derogations from

national bankruptcy law may cause uncertainty and lack of transparency

which can have a negative impact on the funding possibilities of credit

institutions. Such uncertainty thus risks undermining financial stability.

As for the decision to engage in a transfer of assets there must be no

doubt that the management body of each institution is responsible for its

decisions. Public authorities may require the end to a certain behaviour or

activity as well as impose requirements that must be met by the institu-

tion. According to CRD higher capital requirements can be imposed by

the supervisory authority on the financial institution. However, it should

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be the responsibility of the management body to decide how to meet the

demands and requirements from the authorities.

If demands or requirements are not met the relevant authority may use the

instruments they are given by the law including replacing the manage-

ment and revoking the license of the financial institution. However, it

seems to be in contradiction with legal principles if a public authority is

authorized to assume management power over an institution including

ordering transfer of assets between two separate legal entities.

We agree that it will be useful to require the financial institutions to adopt

politics or plans that may be used in case of financial difficulties or im-

minent crises. But it will be almost impossible in advance to foresee

which actions by the management will be appropriate in case of financial

crises or difficulties in a group. Therefore, we do not find that the resolu-

tion plan or financial support agreement should be legally binding on the

institutions.

If it nevertheless is decided that the resolution plan or financial support

agreement should be legally binding on the institution it is necessary to

consider that a group financial support agreement should be approved by

the shareholders’ meeting. However, it is unclear which quorum or ma-

jority would be required in order for the agreement to be approved. This

question is rather critical if there are minority shareholders in any of the

relevant companies as the financial support could potentially, it seems,

favour the majority shareholder (the parent company) at the expense of

any minority shareholders and such a decision could therefore depending

on the circumstances require a unanimous decision at the shareholders’

meeting according to the current rules in some Member States, including

in Denmark.

It is therefore relevant to consider whether national legislation on quorum

and, in particular, majority requirements should apply when the manage-

ment proposes to the shareholders to enter into agreements on intra group

financial support or whether a harmonised set of EU rules should apply. It

could be relevant to map the rules in the different Member States to get

an overview on the current situation in this respect.

Resolution Planning (Part 2.D. – question box 21)

The Commission proposes that the resolution authorities - in consultation

with supervisors - should be required to draw up and maintain resolution

plans for each credit institution for which they are resolution authority.

Credit institutions should supply information necessary for the drawing

up and maintenance of resolution plans on the request of the resolution

authority. We would welcome further clarification on how the institutions

are involved in the development of the resolution plan.

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As mentioned above we find it should be considered if it is possible to

create a clear distinction between “living credit institutions” and "near

death credit institutions" where the supervisor has set a deadline for the

fulfilment of the capital requirement.

Furthermore, the concept of group level resolution authorities and the

need for group resolution plans must be further assessed. The most rele-

vant plan must be the plan for the bank itself. That is where all the activi-

ties are (the assets, liabilities, the depositors etc.).

Finally, we are concerned about the distribution of responsibilities be-

tween resolution authorities and supervisory authorities. We find that the

proposed preventative powers intervene with the normal functioning of

the supervisory process. Such powers should exclusively be applied by

the supervisory authority. A way to solve this issue would be that resolu-

tion authorities would propose to supervisory authorities the imposition

of a list of measures to remove the impediments to an effective resolu-

tion.

Early Intervention (Part 3.E. – question box 24-27)

We are generally supportive of extending the circumstances in which the

supervisory powers of early intervention may be exercised. We find the

triggers sufficiently flexible.

We do not see the necessity of appointing a special manager. We find that

the tools where the supervisor can require the credit institution to replace

one or more board members or managing directors or require their dis-

missal strike an appropriate balance in this respect. Furthermore, it should

be considered that such a tool would be a derogation from the normal

company law framework (outside the insolvency/-resolution phase)

where such issues are left to shareholders and management to decide. It

should be noted that such a measure could be considered expropriation of

shareholders’ rights and thus could activate special constitutional rights in

Member States.

We find that the consolidating supervisor should be responsible for as-

sessment of group level recovery plans and where necessary an agree-

ment on group level should be reached within the supervisory colleges.

Supervisors should strive for a joint decision on the implementation of a

group recovery plan. In case of disagreement supervisors should be able

to refer the matter to the EBA but the EBA decision should not be bind-

ing on the supervisors involved. The suggested timeline (24 hours) for

decisions by the consolidating supervisor and the mediation authority

seems too short.

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Resolution: Conditions, objectives ad general principles (Part 4.F. –

question box 28)

The Commission proposes that the resolution authorities should apply the

resolution tools and exercise the resolution powers when a credit institu-

tion is failing or likely to fail and the conditions for resolution are met.

Again we would refer to the need for a clear distinction between “living

credit institutions” and "near death credit institutions". The triggers for

resolution should follow this distinction.

Specifically, we support option 3 which seems to be the most appropriate

trigger as it is a purely quantitative capital trigger. However, we find that

the trigger needs to be adjusted to specify that the trigger point is where

the bank no longer possesses sufficient tier 1 instruments as required un-

der chapter 2 of title V of the CRD to meet the requirement of Article 75

of the CRD.

We believe the trigger condition of "likely to fail" can create too much

uncertainty. We suggest therefore that the approach should be that the

credit institution notifies the supervisor that it is failing or likely to fail.

This notification means the supervisor sets a deadline to the credit institu-

tion to fulfil the requirements. If this requirement has not been met by the

credit institution the supervisor shall revoke the institution’s license and

the credit institution must be resolved under the responsibility of the reso-

lution authority.

We find that the general principles governing resolution seem appropri-

ate. We attach importance to the principle that creditors of the same class

are treated in a fair and equitable manner and that no creditor incurs

greater losses than would be incurred under liquidation. Furthermore, we

find it necessary to require independent valuation in the resolution pro-

cess.

Resolution tools and powers (Part 4.G. – question box 31)

We find that the resolution framework should cover a broad range of

tools in order to enable member states to address a specific crisis most

effectively. We find the proposed resolution tools sufficiently compre-

hensive to allow resolution authorities to deal with a credit institution

which needs to be resolved.

However, we would welcome further guidelines regarding when the use

of these tools is considered as being in compliance with the Treaty and

state aid rules.

In order to ensure a level playing field and to facilitate smooth coopera-

tion between authorities we agree that resolution tools should as far as

possible be harmonized at EU level. However, this should not prevent

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member states from supplementing the EU resolution framework with

national tools and powers.

We find that the power to take control over the affected credit institution

must be considered carefully and it must be considered in connection

with the assessment of the scope of this framework and the distinction

between supervisors and resolution authorities.

It should also be pointed out that the Danish legislative framework offers

an alternative to ordinary liquidation. For the system not to be expropria-

tory and conflict with fundamental principles it is voluntary for the credit

institution which can always choose a normal insolvency procedure. We

believe that the same approach should be taken at EU level.

Finally, we find that there must be no doubt that holders of covered bonds

and junior covered bonds always will receive timely payment. Applying

resolution tools must not jeopardize this objective. Assets which serve as

collateral for holders of covered bonds and junior covered bonds should

therefore not be affected by resolution or recovery. We suggest that this

special treatment of covered bonds is explicitly taken into account in part

G and when designing the appropriate resolution tools.

Partial transfers: Safeguards and compensation (Part 4.H. – question

box 46-51)

The Commission approach is based on the presumption that the enforce-

ment of close-out netting or security rights may be stayed if a decision of

a resolution is taken.

Should this be the case we find it important that all or none of the transac-

tions/securities comprised by a netting agreement and/or financial collat-

eral agreement should be included in the stay and that safeguards are ap-

plied accordingly. A solution where transactions entered into or securities

provided under the same agreement are split in case of a resolution may

lead to unexpected losses for banks who in their daily risk management

procedures will not be able to foresee exactly how a possible resolution

related to an unknown counterparty may impact its counterparty risk.

We also find that it should be considered if the proposed safeguards

should lead to amendments of or supplements to the Financial Collateral

Directive. Financial Collateral Agreements including netting agreements

are regulated by that directive while this is not the case for set off and

structured finance arrangements.

We agree that the protection against cherry picking if a resolution is

commenced may affect the flexibility of the resolution authority. Howev-

er, we find that the safeguard of legally sound agreements on which mar-

ket participants base their risk management should be protected.

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We also find that express provisions for the protection of trading, clearing

and settlement systems should be made. The provisions of the Settlement

Finality Directive should suffice provided that the priority between the

Settlement Finality Directive and the crisis management framework is

clearly defined. If amendments or supplements to the Settlement Finality

Directive are required or are desirable may depend on the final wording

of the crisis management legislation.

Group Resolution (Part 5 – question box 52-53))

We agree that there is an urgent need to strengthen cross-border coopera-

tion during emergency situations and to prevent fragmented national re-

sponses.

In order to ensure effective coordination and take advantage of existing

structures we believe that the ‘institutionalisation’ of cross-border resolu-

tion groups as suggested by the Commission should be implemented

through the existing cross-border stability groups. A possibility would be

to form a resolution college as a subgroup to the cross-border stability

groups. In this context the Nordic-Baltic Cross-Border Stability Group

(NBSG) has been established in mid 2010 to implement the Nordic and

Baltic agreement on financial stability.

A challenge in implementing effective resolution colleges will be to en-

sure that responsibilities for group resolution are not dissipated in a

committee structure that will remain relatively complicated and frag-

mented. We welcome that the group level resolution authority can decide

on the composition of the resolution college.

We find that resolution colleges can prepare the emergency situation and

take into account the responsibilities of national authorities and strive for

a voluntary joint decision as to the activation of an agreed group resolu-

tion plan. A common toolbox of resolution tools can facilitate group reso-

lution.

We find that the framework strikes an appropriate balance between the

coordination of necessary actions to deal with a group in an imminent

crisis and the need for authorities to react quickly if the situation requires

it.

Financing arrangements (Part 6 – question box 57-61)

We strongly support that member states should be able to meet financing

requirements for the resolution regimes through the existing structure of

the deposit guarantee schemes in order to exploit synergies. The compati-

bility of such an approach with staid aid rules should be made clear.

As for the target size and the phasing in of the fund it is necessary to take

into account the various other regulatory initiatives under way, e.g. capi-

tal and liquidity requirements, as well as the revision of the directive on

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deposit guarantee schemes. Too strict financing requirements in the new

resolution regime may risk destabilising the financial systems in member

states. An appropriate balance between ex ante and ex post financing is

therefore necessary.

Design of debt write down as a resolution tool (Annex I – question

box 62-66)

We fully support the introduction of a resolution tool as proposed by the

Commission with a possibility to write off all equity and either write off

subordinated debt or convert it into an equity claim. Such approach

would be in line with the principles underlying the current Danish resolu-

tion framework.

To provide sufficient flexibility in the resolution phase the Commission

considers two possible models for additional write down powers.

A comprehensive approach where the authorities are given a statutory

power to write down by a discretionary amount or convert to an equity

claim all senior debt. The comprehensive approach aims to make a broad

range of senior creditors face the real risks associated with failure of

credit institutions. It would be exercisable in principle in relation to all

senior debt.

Furthermore, a targeted approach where the authorities require credit in-

stitutions to issue a fixed volume of 'bail-in able' debt which could be

written down or converted into equity based on a statutory trigger.

A transparent and credible possibility of debt write down will be neces-

sary to ensure that creditors of especially large credit institutions will do a

thorough analysis of credit risk before lending to a credit institution. In

addition it is also necessary to ensure resolution of a credit institution

without government intervention. With a debt write down the credit insti-

tution can continue its business to the benefit of the economy.

The comprehensive approach is preferred since it is at least as attractive

as the alternative (i.e. liquidation) to creditors. This is important because

otherwise there will be creditors who would have been better off in a liq-

uidation process and consequently could hold the management or the res-

olution authority responsible for their loss. Furthermore, this approach

works in all circumstances since - contrary to the targeted approach -

there is no upper limit to the write down.

It should be ensured that all creditors of the same ranking (in respect of

the situation in liquidation) should receive the same write down. Shares,

hybrids and subordinated debt should be written down first. All classes of

other debt should be written down with the same percentage. Also de-

positors should be faced with write downs. The deposit guarantee scheme

will, however, cover most of the losses.

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It should be noted that if a debt write down applies to shares or existing

debt issued before entry into force of the power such write down could be

expropriatory and a compensation mechanism would be necessary.

The write down should be calculated based on the debt net of eventual

loans etc. i.e. a depositor with deposits of EUR 1 million and a loan of

EUR 1 million should be set-off and should not face any write down.

The condition for entering into a debt write down could be that the super-

visor finds that a bank no longer possesses sufficient total capital instru-

ments as required under the CRD. However, in practice it is also a neces-

sary condition that the credit institution:

- has incurred losses that will deplete its equity, or

- is or is likely to be unable to pay its obligations in the normal course of

business.

The write down must as a consequence be followed by a takeover and a

recapitalization by the resolution authority for the institution again to ful-

fill the capital requirement.

The amount of write down will have to be determined or evaluated by

authorized public accountants.

However, there are also merits in the targeted approach. The write down

feature will only affect an investor group which already knows this risk

and minimizes the risk of the holders of “truly” senior tranches. Based on

the Danish experience the need for write down can, however, turn out to

be significant. In a present case the write down was 40 percent. However,

if around 30 per cent of the total liabilities are with a write down feature

it would help to ensure that most institutions are resolvable. It is, howev-

er, not clear that it would be possible in practice to issue such large

amounts.

A further advantage of the targeted approach is that it does not contain

the same problems in relation to expropriation and rights of shareholders

and creditors as the comprehensive approach since the write down is

made on a contractual basis.

As we understand it, the targeted approach can be used in both going and

gone concern. If used in a going concern, i.e. debt is converted to equity

in order to avoid bankruptcy, debt holders will probably expect share-

holders to bear losses as well. Furthermore, if the issuance of “bail-in

able” debt is required by the authorities there is a question as to the mar-

ket demand for such debt and what to do if the bank cannot sell the

amount of “bail-in able” debt required by the authorities.

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As mentioned earlier we find that there must be no doubt that holders of

covered bonds and junior covered bonds always will receive timely pay-

ment. Holders of covered bonds shall according to CRD and UCITS ben-

efit from a privileged status in case of bankruptcy and holders of junior

covered bonds do also benefit from such a status. It should therefore be

made clear that covered bonds and junior covered bonds should not be

subject to debt write down.

Company Law (Annex II – question box 69-70)

Firstly it should be mentioned that the existing Danish resolution system

coexists with and does not require derogations from national company

law.

Evidence from the recent financial crisis seems to suggest that there could

be a need for creating a mechanism for a rapid increase of capital.

Option 2 (a general meeting mandate to the management body) would

provide the possibility for a more rapid increase of capital whereas Op-

tion 1 (shortened convocation period) would leave the shareholders more

in control of the capital increase. We find that depending on the state of

the emergency speediness or shareholder control could be the priority.

According to the working document Option 2 presupposes a derogation

from the 2nd Company Law Directive. In that context it should be noted

that Article 25(2) of that directive already provides for the possibility of a

mandate which, however, must not be longer than maximum 5 years.

It is unclear what would be the situation in case the general meeting does

not provide for either of the two options. Presumably the normal frame-

work would apply with the risk that the capital increase can not be decid-

ed on in time to prevent the financial institution from entering the resolu-

tion phase.

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Annex II: The Danish winding-up framework

In the autumn of 2010 Denmark established a national crisis resolution

mechanism to deal with distressed banks. The objective of the Danish

resolution mechanism is to safeguard financial stability and to minimize

economic losses when a bank becomes unable to meet the statutory capi-

tal requirements. The framework offers the banks an alternative to ordi-

nary liquidation if it is not possible to find a private solution. A distressed

bank can decide on a voluntary basis to be wound up under the resolution

mechanism.

The steps in the resolution mechanism are the following:

When a bank no longer meets the statutory solvency requirement the

Danish Financial Supervisory Authority sets a date at which the bank

again has to comply with the solvency requirement. This is the trigger

for the framework.

Within six hours after the receipt of the injunction the bank has to no-

tify the Danish Financial Supervisory Authority whether it wants to

be resolved by the Danish Financial Stability Company A/S (in case it

fails to meet the solvency requirements in time).

Within the timeframe set by the Danish Financial Supervisory Au-

thority the bank can make private arrangements to stabilize the bank

or the bank can enter into a transfer agreement with the Danish Fi-

nancial Stability Company A/S.

According to statutory requirements banks shall at all times be able to

within 24 hours to produce necessary statements and information

about deposit and loan accounts, pension custody accounts etc. of the

bank so that Danish Financial Stability Company A/S can make a pre-

liminary valuation of the assets and liabilities.

Procedures have been set in place between relevant national authori-

ties making it possible for a transfer to be effected during a weekend

(establishing a new bank, provide the new bank with sufficient capi-

tal, and, if necessary, liquidity, transfer the assets etc.).

The "old" bank goes bankrupt and is liquidated in accordance with ordi-

nary bankruptcy law. The framework allows for potential losses to senior

creditors and large depositors as well as shareholders and subordinated

debt while maintaining a going concern organization. After the transfer

the Financial Stability Company will reorganize the "new" bank and re-

solve it.

The new scheme was tested for the first time during the weekend of 4-6

February 2011 when Amagerbanken A/S - a Copenhagen based bank rep-

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resenting around 1 per cent of the total amount of loans granted by Dan-

ish banks - notified on 4 February 2011 the Danish Financial Supervisory

Authority that it no longer met the solvency requirement under the Dan-

ish Financial Business Act. The bank was given until 6 February 2011 (7

p.m.) to fulfil the solvency requirement set by the Danish Financial Su-

pervisory Authority. During the weekend the bank entered into a transfer

agreement with the Danish Financial Stability Company (Finansiel Sta-

bilitet A/S) and effective of 6 February 2011 Amagerbanken A/S trans-

ferred all of its assets to a newly formed subsidiary bank under Finansiel

Stabilitet A/S. Customers normal banking business (e.g. use of credit

cards, debtor cards etc.) were not affected during the weekend. The bank

opened as usual Monday morning with no apparent difference for the cus-

tomers, who can still conduct normal banking business.

Payment for the transferred assets has been set at a preliminary DKK 15.2

billion, corresponding to approximately 59 per cent of the bank's unse-

cured senior liabilities. Payment has been effected by the new bank tak-

ing over liabilities in the same amount. Creditors including depositors

whose net deposits with Amagerbanken A/S are in excess of EUR

100.000 (approx. DKK 750.000) must anticipate immediate losses of ap-

proximately 41 per cent as the bank is liquidated.

The final amount to be paid will be determined within three months from

now by assessors appointed by the Institute of State Authorized Public

Accountants in Denmark. If the final amount exceeds the preliminary

amount the new bank will take over additional liabilities. There are cur-

rently known liabilities of DKK 13.2 billion which will not be taken over

- of these DKK 2.6 billion are subordinate liabilities and DKK 5.6 billion

are liabilities individually guaranteed by the State.

The new bank will receive capital and liquidity from Finansiel Stabilitet

A/S so that it will fulfil the capital and liquidity requirements under the

Financial Business Act. If the closing of the bank yields proceeds exceed-

ing Finansiel Stabilitet A/S' contribution plus interest accrued at a mar-

ket-based rate of return requirement, the proceeds will be applied to cover

liabilities not transferred to the new bank in which case the losses of cred-

itors will be reduced.

The Commission has been informed about the transfer of all

Amagerbanken A/S' assets to the newly formed subsidiary bank under

Finansiel Stabilitet A/S and the transfer will be notified to the Commis-

sion in the near future.