1. 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)

2. 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 employees and 11 distressed banks

3. 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

4. Legislation from 2008 til 2011 – In brief
October 2008 The Bank Package (Bank Package I) - general state guarantee. Terminated end September 2010
February 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 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 Consolidation Package (Bank Package IV) – compensation from the Danish Deposit Guarantee Fund and the Financial Stability Company. Extension of individual state guarantee

5. ”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)

6. 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.

7. 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

8. 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

9. 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

10. 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

11. 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

12. 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

13. 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

14. 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

15. 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

16. 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

17. 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

18. 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

19. 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