The individual government guarantee scheme (Bankpakke IV)

Date 19 sep. 2011
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On 25 August, the Government, the Social Democratic Party, the Danish People’s Party, the Socialist People’s Party, the Radical Liberal Party and Liberal Alliance agreed to a number of consolidation initiatives (“Bankpakke IV”). The main points will be elaborated on below and are as follows:

  1. Expanded “dowry”
  2. State guarantee at mergers
  3. Contribution financing of the Danish Guarantee Fund for Depositors and Investors
  4. Identification of the banks which are ”to large to go down”

Background

In spite of the fact that the Danish financial sector is generally healthy and sound at present as a consequence of the former government guarantee schemes, there is still a risk that small and medium sized financial institutions will develop solvency problems through to 2013.  Moreover, a number of small and medium sized financial institutions may find it difficult to obtain the liquidity which will be necessary when the individual state guarantees expire in 2012 and 2013, just as the reawakened unrest in the global financial markets has given rise to further insecurity regarding the institutions’ access to funding. With Bankpakke IV, the contracting parties have agreed to implement a number of additional initiatives:

 

  1. Strengthening of the ”dowry scheme” to make it more attractive to take over distressed institutions
  2. Removal of barriers for mergers between financial institutions through possibilities of state guarantee with increased premium payment
  3. Contribution financing of The Danish Guarantee Fund for Depositors and Investors (and the winding up department) so that the sector’s payments to the scheme are levelled out together with the establishment of a possible consolidation fund
  4. Preparation of future rules on systemic material financial institutions in Denmark.

Below, the four points will be elaborated on:



The four initiatives

 

Expansion of the dowry scheme

The expansion is implemented to make it more attractive for healthy financial institutions to take over distressed financial institutions fully or partly before Bankpakke III applies. In this way, it is avoided that uncovered creditors in the distressed institution not covered by the Guarantee Fund for Depositors and Investors or individual state guarantee suffer a loss.

 

The dowry scheme is expanded in two ways which both entail that the state can contribute with the loss on the individual state guarantee provided to the institution which should be expected if the institute was to be closed down according to Bankpakke III. 

 

Model I

An opportunity is given for Finansiel Stabilitet to provide a dowry in a situation in which a healthy financial institution is willing to take over the distressed financial institution in full (exclusive of share capital and other subordinated capital). Finansiel Stabilitet will as a main rule determine the state dowry taking bases upon the same valuation of the distressed financial institution’s assets and liabilities as is used at determination of dowry from the Guarantee Fund for Depositors and Investors.  


It is a prerequisite that Finansiel Stabilitet finds that a dowry solution does not put Finansiel Stabilitet in a worse position than would have been the case had Finansiel Stabilitet had to handle the distressed bank by closing it down according to Bankpakke III. Furthermore, it is a prerequisite that the state dowry does not constitute a larger part of the individual state guarantees in the distressed financial institution than the part which the Guarantee Fund for Depositors and Investors’ dowry constitutes of the deposits covered by the Deposit Guarantee Scheme in the distressed financial institution.

 

Finansiel Stabilitet’s dowry must be provided subject to a subsequent re-adjustment of the dowry (”earn out”) if, three years after the takeover, it turns out that the distressed financial institution yields a larger profit to the acquiring institution than what was expected.

 

Model II

Finansiel Stabilitet may wind up the unhealthy part (the red part) of the distressed financial institution with dowry from the Deposit Guarantee Scheme and inclusion of the expected loss on the individual state guarantees at winding up according to Bankpakke III, while a healthy financial institution takes over the healthy part (the green part) of the distressed financial institution and without uncovered simple creditors suffering any losses.

 

It is a prerequisite for the use of the model that the loss which Finansiel Stabilitet expects to incur at the takeover of the distressed institute does not constitute a larger part of the individual state guarantees than the part which the Guarantee Fund for Depositors and Investors’ dowry constitutes of the deposits covered by the Deposit Guarantee Scheme in the distressed bank.

 

If the result of the winding up is better than expected, the Guarantee Fund for Depositors and Investors, Finansiel Stabilitet, the shareholders and other subordinated capital in the distressed financial institution have an ”earn out” according to a natural bankruptcy order.


State guarantee scheme at mergers

To support the consolidation among financial institutions, a scheme is introduced according to which the financial institutions may apply for an individual state guarantee in connection with a merger through to the end of 2013.


Finansiel Stabilitet may conclude an agreement on individual state guarantee in two cases:


Firstly, individual state guarantee may be agreed when a merger between two financial institutions results in senior loans falling due. In this case, the guarantee will have the same currency and amount as the payable loan. A ceiling of DKK 10 billion is determined for provision of such guarantees.

 

Secondly, an individual state guarantee may be agreed for replacement of present individual state guarantees in the specific case that two financial institutions of which at least one has an individual state guarantee wish to merge. The new guarantee may have a term of up to three years and may as a maximum cover the same amount as the existing guarantees in the merged financial institutions. A ceiling of DKK 40 billion is determined for the provision of such guarantees.

 

It is a prerequisite for the provision of an individual state guarantee that:

  1. the merger is considered a merger according to the Competition Act.
  2. a business plan exists which has been approved by the Financial Supervisory Authority
  3. it is Finansiel Stabilitet’s opinion that the merger between the two financial institutions reduces the state’s collective risk on the continuing institution’s obligations compared to the risk that the state would have if the institutions continued separately
  4. at least one of the merged institutions are not under tightened supervision by the Financial Supervisory Authority and that the Financial Supervisory Authority estimates that the merged financial institution will not need to be subject to tightened supervision in near future.

The Guarantee Fund for Depositors and Investors’ financing

The Guarantee Fund for Depositors and Investors’ present form of financing may in cases of material losses in the Guarantee Fund for Depositors and Investors affect the financial institutions’ solvency noticeably in periods in which the sector is already economically challenged. Moreover, it is expected that a new EU directive will entail that the Guarantee Fund for Depositors and Investors’ fortune must be increased materially in 2013 through to 2027. 

 

To achieve a balanced load of the sector in connection with payments to the fund, it is thus the intention that the financing of the Guarantee Fund for Depositors and Investors is changed so that, in future, it is based on an insurance-like financing with annual premiums. The Guarantee Fund for Depositors and Investors (including the winding up department) continues to be fully financed by the sector.


Systemic material financial institutes – SIFIs

An expert committee is appointed which must determine:

  1. which criteria must be met in order for an institute to be considered a Danish SIFI
  2. which demands must be made for SIFIs (e.g. increased capital requirements and tightened supervision) however, in such way that equal competition between SIFIs and other credit institutions is aimed at.
  3. what instruments may be used in relation to SIFIs which encounter problems.

Future course of events

As soon as possible, the Minister of Economic and Business Affairs will introduce the necessary bills and documents. At the same time, the extended dowry scheme and the guarantee scheme must be approved by the European Commission according to state aid rules.



If you have any questions or require additional information on Bankpakke IV, please contact Partner Claus Molbech Bendtsen (cmb@mwblaw.dk) or Attorney Henning Hedegaard Thomsen (hht@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.