New Guidelines Concerning Authorisation for Intragroup Engagements

Date 14 apr. 2011

 

The Danish Financial Supervisory Authority has published new guidelines which set up criteria for when a financial company may have group internal engagements with companies other than their subsidiaries. Among other things, assessment of the limitations on the size of the engagements has been changed.


The essential elements in the guidelines and the changes relative to the earlier guidelines will be described in the following.  

 

Background

The guidelines are published in order to bring clarity to the practice of The Danish Financial Supervisory Authority concerning the authorisation for intragroup engagements. The background for the practice is that the Financial Business Act prescribes that financial companies may only have intergroup engagements if they are granted authorisation by the Danish Financial Supervisory Authority. Engagements with subsidiaries are excluded from the regulation.


The new guidelines were necessary because of changes in the executive order concerning large engagements and the financial regulations. The notes have also been changed to make them more sensible.


Central elements of the guidance notes

It is initially established that an authorisation is required even though the engagement does not weigh on the framework, i.e. that it should not be counted in when assessing if the authorisation may be given, and even though security for the engagement has been offered. As a consequence hereof, financial companies are required to apply for authorisation in all cases where they want to enter into a group internal engagement.


The guidelines set up two different maximum limits within which the engagements must stay. The limits are referred to as max 1 and max 2. In general, both limits are to be respected, and separate calculations are to be made for the financial company itself and for the financial company and its subsidiaries collectively. Subsequently, the smallest framework calculation is used. It applies to both limits that write-downs and depreciations are deducted from the engagements and that a security in the shape of claims on or guarantees from states or central banks in a member state of the European Union and certain other countries may reduce the specific engagement with the trade value of the security. 


The engagements are assessed as the sum of outstanding accounts which represent a credit risk and shares which are issued by affiliated companies. Some engagements are excluded from the calculation of whether the limits are respected. Included herein are e.g. covered bonds, even if they have been issued by a group internal company.


To comply with max 1, the financial company may as a maximum have engagements with parent companies and other associated companies which constitute the basis capital less 75% of the capital requirement. The capital requirement is assessed as the largest of the solvency need, the solvency requirement and the minimum capital requirement, but may not be lower than an individually specified capital requirement or the increased capital requirement.


In the case of max 1, it must be weighted according to the type of the engagement. Subordinate debt is for instance weighted by factor 1, while general guarantees are only weighted by factor 0.5.


With regards to max 2, no weighting is made, and the engagements may not exceed the basis capital. Apart from the abovementioned, only some compulsory guarantees for mortgage banks are excluded from the calculation.


The authorisation for group internal engagements is normally only given if the above-mentioned limits are respected. However, the Danish Financial Supervisory Authority may authorise engagements which exceed the limits and may refuse to grant authorisations or establish a lower limit if the circumstances warrant it. The authorisation is normally granted for one year at a time.  


The financial company is obliged to inform the Danish Financial Supervisory Authority if material changes occur regarding the information which the authorisation was based on. Such changes may result in the framework being limited or the authorisation being revoked.


What’s new compared to the former guidelines?

The changes to the guidelines may be divided into three sections in that they concern the content of the two limits, the making up and weighting of the engagements and which engagements weigh on the framework.

 

With regards to the content of the two limits, it is only in connection with max 1 that changes have been made.


In the former guidelines, max 1’s framework was quantified as 25% of the capital requirement with addition of the entire excess cover, i.e. the value by which the basis capital exceeds the minimum capital requirement. Currently, the limit is the basis capital less 75% of the capital requirement. In addition to this, a special rule for life insurance companies etc. existed concerning the making up of the 25%.


In connection with the making up of the engagements, the guidelines have been changed so that they are now to be assessed after deduction of accounting write-downs, provisions and depreciations, and that off-balance sheet items are included at their nominal value. Earlier, the engagements were assessed before deduction of accounting write-downs, provisions and depreciations, and it was unspecified how off-balance sheet items were to be valued. The weighing has been changed so that financial instruments and internal tax liabilities are no longer specified separately. However, it must be assumed that they will figure with the same weight under additional debt.


Finally, it is now specified that covered bonds and mortgage credit bonds issued in the group before 31 December 2007 do not weigh on the framework, and that the same is the case when it comes to additional guarantees given in connection with mortgage lending.  



If you have any questions or require additional information on the new guidelines, please contact Partner, attorney Dan Moalem (dmo@mwblaw.dk) or Partner, attorney Christoffer Galbo (cga@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 for decisions or considerations.