The individual government guarantee scheme (Bankpakke III)

Date 19 apr. 2010

On 24 March 2010, the Minister for Economic and Business Affairs promulgated a bill with the approval of his majority. This bill was quickly named “Bankpakke III”.

 

Basically, the bill consists of three initiatives. Firstly, Financial Stability A/S still has the opportunity to make assignments with distressed credit institutions that have received a deadline to comply with the capital adequacy requirements, according to the Financial Business Act (“FBA”), Section 225 (1). The guarantee scheme now contains provisions that explain the details for these assignments. The most important provisions will be described in this article.

 

The second initiative deals with reorganization of the Deposit Guarantee Fund (“Fund”), so the Fund now should establish an isolated section for winding-up. This section for winding-up shall provide a guaranty to Financial Stability guaranteeing every potential loss that Financial Stability may suffer in connection with the capitalisation and the injection of liquids to the subsidiary company overtaking the distressed credit institution. The Deposit Guarantee Fund must also guarantee the first 100,000 euro belonging to private and business depositors. That means that amounts which exceed the 100,000 euro are not guaranteed, see Section 16i (2) of the bill.

 

The third and last initiative deals with the credit institutions’ internal systems that have to be effective in order to react fast when a crisis is approaching.

 

Financial Stability A/S

Firstly, the proposed procedure for Financial Stability A/S’s assignment of the distressed credit institution shall be described. Secondly, the article will describe what amounts is secured and who will secure the amounts.

 

According to the proposed Section 16e, Financial Stability A/S shall participate in the winding-up of a distressed credit institution. With the proposition, the role of Financial Stability A/S is not radically altered, but the guarantee scheme ensures that Financial Stability keeps its role also after 30 September 2010.

 

Financial Stability A/S shall float a subsidiary company that shall assign a distressed credit institution’s assets and carry out a controlled wind-up. Subsequently, the credit institution will go into bankruptcy while the subsidiary company takes care of the costumers. A controlled wind-up must be understood as the obligation of the subsidiary company to divest of the costumers by helping them to find new credit institutions. Furthermore, the subsidiary companies are not allowed to carry out aggressive marketing activities or otherwise compete with the market.

 

According to the suggested Section 16f, a distressed credit institution that has received a deadline according to FBA Section 225 to comply with the capital adequacy requirements must, as quickly as possible, and no later than six hours after the credit institution has become familiar with the deadline, make a decision and inform the Danish Financial Supervisory Authority if it is unable to obtain the needed capital within the time limit, wants to be winded up by Financial Stability A/S or wants to be liquidated “the classical ways” such as suspension of payments or bankruptcy pursuant to Section 15 of FBA . The decision is voluntary.

 

If (1) the Danish Financial Supervisory Authority has announced a deadline and (2) the distressed credit institution has made a decision to be winded up by Financial Stability and (3) the capital adequacy requirements are not met, the distressed credit institution must immediately make a deal with Financial Stability A/S regarding acquisition of the credit institution’s assets, see the proposed Section 16g (1). The purchase price must temporarily be agreed between the two parties, but the final price is determined by two accountants, see Section 16g (9).

 

Immediately after the temporary transfer of the credit institution, a notice must be issued to the creditors with a deadline of 12 weeks, see the proposed Section 16h.

 

The Danish government guarantee expires on 30 September 2010. Instead, most of the ordinary debtors will be covered by the Fund, where the limit is an amount of 100,000 euro. It is important to note that it it has always been the plan that the first 100,000 euro should be covered and this is not a result of the guarantee scheme. Even though it is still important to mention in connection with the guarantee scheme. The result of this is that if you owe 100,000 euro and have funds in the credit institution worth 200,000 euro, you will be guaranteed 100,000 euro.

 

If a debtor has more than 100,000 euro in the distressed credit institution, the debtor will be able to manage the guaranteed amount plus an amount corresponding to a percentage of the difference between the guaranteed amount and the debtor’s deposit, see the proposed Section 16i (2).

 

The Deposit Protection Fund

The Fund must offer a guarantee to Financial Stability A/S, if the subsidiary company of Financial Stability A/S overtakes a credit institution to wind it up, see the proposition to amend of the act on guarantee fund, Section 2a. The guarantee must cover the losses that Financial Stability suffers when the capitalisation and the provision of liquids to the acquiring subsidiary company takes place and must cover any loss of the subsidiary company which is a result of the winding-up.

 

This ensures that Financial Stability A/S (which ultimately means the Danish state) do not suffer any economic loss, because these are covered by the Fund (which ultimately means the financial sector).

 

This guarantee must be given by a separate section of the Fund called the winding-up section. This way the money that are earmarked to the Deposit Protection Fund are not mixed with the money earmarked to guarantee the losses of Financial Stability A/S. It is important to the lawmakers that “waterproof walls” exist between the winding-up section and the other sections of the Fund. The winding-up section must have a capital of minimum 3,2 billion DKK. The capital shall only consist of guarantees from the credit institutions that are obliged to contribute, se the proposed Section 7 (2) (3). That means that there are no actual funds in the capital.

 

Demands to the internal systems

It is stated in the proposal to the act on financial stability, Section 16f (2), that the distressed credit institution immediately after deciding to be winded up by Financial Stability A/S must take the necessarry steps to make a quick transfer of the assets to Financial Stability A/S’s subsidiary possible.

 

To support this, the guarantee scheme contains a proposition for a new provision in FBA. The new Section 245a states that the credit institution must make sure that they have adequate systems, so that the credit institution within 24 hours may present the necessary overviews and information about accounts and balances.

 

The Danish Financial Supervisory Authority is authorised to decide further rules about how the credit institutions must develop their internal systems and about which information shall be provided within 24 hours.

 

Time horizon

The bill is sent to hearing at the end of March and is expected to be proposed in the middle of April. The bill is expected to be passed before the old government guarantee scheme expires 1 October 2010.

 

 

If you have questions regarding the above or require additional information regarding regulation of credit institutions, please contact attorney Claus Molbech Bendtsen (cmb@mwblaw.dk) or trainee Ted Rosenbaum (tro@mwblaw.dk).

 

The above does not constitute legal counselling and Moalem Weitemeyer Bendtsen does not warrant the accuracy of the information. With the above text, Moalem Weitemeyer Bendtsen has not assumed responsibility of any kind as a consequence of a reader’s use of the above as a basis of decisions or considerations.