The Danish Financial Stability Company - Experiences with bank crisis resolutions and bank packages v/Jimmy Scavenius, Senior Legal Counsel, Finansiel Stabilitet A/S (the Financial Stability Company)

The Financial Stability Company - In brief October 2008: The Financial Stability Company was founded January 2009: 1 CEO, 2½ employees, and 1 distressed bank Medio 2011: Reorganization of the group and a new joint company domicile October 2011: 1 CEO, 30 employees, 1 group with approx. 800 employees and 11 distressed banks

Organisation chart of the Financial Stability Company (Financial Holding Company) FS Bank (Bank) FS Finans (Finance Company) FS Ejendomsselskab (Property Company) FS Pantebrevsselskab (Mortgage Deed Company) Amagerbanken af 2011 Fjordbank Mors af 2011 Max Bank af 2011

Legislation from 2008 til 2011 – In brief October 2008 The Bank Package (Bank Package I) - general state guarantee. Terminated end September 2010 February 2009 Credit Package (Bank Package II) - individual state guarantee and capital enjectio (Tier 1) from the State. Terminated end December 2010 October 2010 Exit Package (Bank Package III) – haircut on unsecured senior loans and deposits above EUR 100,000 Juni 2011 Amendment to the Exit Package - opportunity for the Danish Deposit Guarantee Fund to supply funds or provide guarantee against losses to a buyer bank August 2011 Consolidation Package (Bank Package IV) – compensation from the Danish Deposit Guarantee Fund and the Financial Stability Company. Extension of individual state guarantee

”Costumers” so far – those who didn´t make it The Bank Package (Bank Package I): Ebh Bank (21 November 2008) Loekken Sparekasse (2 March 2009) Gudme Raaschou Bank (16 April 2009) Fionia Bank (28 May 2009) (Roskilde Bank (10 August 2009)) Capinordic Bank (11 February 2010) Eik Bank (14 October 2010) Eik Banki (14 October 2010) Exit Package (Bank Package III): Amagerbanken (6 February 2011) Fjordbank Mors (24 June 2011) Consolidation Package (Bank Package IV): Max Bank (8 October 2011)

Exit Package (Bank Package III) The Exit Package has the following scope: The winding-up scheme under the Exit Package is voluntary for distressed banks If a bank no longer meets the statutory solvency requirement the Danish FSA will set a time limit Within this time limit the bank can make private arrangements or enter into an agreement with the Financial Stability Company The Financial Stability Company sets up a new subsidiary – new bank - with the purpose of taking over all assets and a part of the liabilities of the distressed bank over night (during a weekend) The new bank will open Monday morning and the depositors will have access to their accounts.

Exit Package (Bank Package III) The Exit Package allows for potential losses to senior creditors and major depositors (above 100,000 EUR) as well as shareholders and subordinated debt Remaining liabilities stays in the distressed bank, which is declared bankrupt Provisional dividend is paid to creditors with remaining senior claims Preclusive advertisement for creditors to lodge claims within 3 months from the transfer The final amount to be paid to major depositors and other creditors will be determined within three months from the take-over by valuers (accountants) appointed by the Institute of State Authorized Public Accountants in Denmark. The Danish Deposit Guarantee Fund grants a guarantee to the Financial Stability Company in case it turns out that the assets were aquired at a too high value causing losses after winding up the new bank

Amendment to the Exit Package (Bank Package III) – June 2011 The Danish bank packages state that private solutions must always have priority before a bank turns to the use of resolution under the Financial Stability Company, i.e. the Exit Package The Amagerbanken-Case showed that it was not possible to find a private solution To make private solutions more attractive a compensation scheme (amendment to the Exit Package) was passed through the Parliament in June 2011 The scheme implies that the Danish Deposit Guarantee Fund can choose to supply funds or provide guarantees against losses, when activities of a distress bank are being transferred to another bank It is a condition for the use of the compensation scheme that the Danish Deposit Guarantee Fund finds the solution more attractive, financially, than a resolution under the Financial Stability Company, i.e. the “original” Exit Package model

Amendment to the Exit Package (Bank Package III) – June 2011 The compensation scheme is financed by the contributing banks (financial sector). Thus, the costs of the compensation scheme are born by the financial sector itself Despite the compensation scheme – Fjordbank Mors (June 2011) was transferred to the Financial Stability Company in accordance with the “original” Exit Package model

Consolidation Package (Bank Package IV) – August 2011 The Consolidation Package has the following scope: Strengthening of the compensation scheme to make it more attractive to take over distressed banks Removing barriers to mergers between banks by offering an individual state guarantee with higher premium – Not yet approved by the EU Commission Financing through contributions to the Danish Deposit Guarantee Fund to even out sector payments to the scheme as well as establishing a possible consolidation fund Preparing future regulation on Systemically Important Financial Institutions (SIFI) in Denmark

Consolidation Package (Bank Package IV) – August 2011 Re 1. Strengthening of the compensation scheme in the Exit Package to make it more attractive to take over distressed banks – two models: Model 1 The Financial Stability Company may provide compensation if a sound bank is willing to take over the entire distressed bank It is a condition that the Danish Deposit Guarantee Fund provides compensation as well The Financial Stability Company will state compensation on the basis of the same valuation of assets and liabilities of the distressed bank as the determination compensation from the Danish Deposit Guarantee Fund under the amended Exit Package

Consolidation Package (Bank Package IV) – August 2011 Re 1. Strengthening of the compensation scheme in the Exit Package to make it more attractive to take over distressed banks – two models: Model 2 Part of the distressed bank might be resolved under the Financial Stability Company – new subsidiary - with compensation from the Danish Deposit Guarantee Fund while a sound bank takes over the sound part of the distressed bank Both models build on the compensation scheme in the Exit Package. In both models the state can contribute with the expected loss on an individual state guarantee if the bank were to be wound up under the Exit Package Max Bank – 8 October 2011

Consolidation Package (Bank Package IV) – August 2011 Re 2. Removing barriers to mergers between banks by offering an individual state guarantee with higher premium The purpose is to support consolidation among banks by introducing a scheme where banks may apply for an extension of an existing individual state guarantee in connection to a merger until the end of 2013 New individual state guarantees can be issued if a merger activates “change of control” conditions on senior loans Not yet approved by the EU Commission

Consolidation Package (Bank Package IV) – August 2011 Re 3. Financing through contributions to the Danish Deposit Guarantee Fund to even out sector payments to the scheme as well as establishing a possible consolidation fund   The existing method of financing the Danish Deposit Guarantee Fund may in the event of considerable losses of the Danish Deposit Guarantee Fund influence the solvency of banks significantly Furthermore the new EU Directive is expected to entail that the assets of the Guarantee Fund are to be increased considerably Therefore it is the intention to change the financing of the fund so that it will be based on insurance-like financing with annual premiums

Consolidation Package (Bank Package IV) – August 2011 Re 4. Preparing future regulation on Systemically Important Financial Institutions (SIFI) in Denmark An expert committee with an independent chairman will be set up under the auspices of the Ministry of Economic and Business Affairs Based on the coming EU regulation the expert committee must clarify: Which criteria are to be met for a bank to be a Danish SIFI Which requirements are to be set for SIFIs. Efforts should be made to ensure equal competition between SIFIs and other credit institutions in Denmark, as well as fair conditions of competition compared with SIFIs countries Which instruments may be used in relation to SIFIs which experience difficulties The expert committee must report to the Ministry of Economic and Business Affairs in 2012

Experience - Winding up/divestment Requirements about high lending rates, low deposit rates and poor access to new granting of credits brings to the widest possible extent costumers to find a new bank on their own initiative In the process of selling the good parts of the bank (the ”green bank”) the Financial Stability Company pursues a sale including at least all private costumers Exposures within certain businesses is exceptionally difficult to sell in the current market (agriculture and real estate) Winding up shall be pushed through in consideration of minimising distortion of competition and economical considerations The Financial Stability Company will probably live longer than first expected

Experience - What went wrong? Lending activities were characterized with bad loan quality and granting of credit conflicting with the credit policy Insufficient credit management and bad credit administration Significant exposures within the real estate market

Experience – Crisis indicators so far Very strong management Very weak management Local banks doing business far away from home High exposures within the real estate market

Did it go as expected? More distressed banks than expected More legislation than expected It has shown more difficult to wind up the bad parts of the bank (the ”red bank”) than expected We have hardly seen the last ”costumer” in the Financial Stability Company – nor the last bank package