The Danish National Bank widens commercial banks' and mortgage-credit institutes' access to collateralised credit facilities

Date 25 okt. 2011

 

In a press release from 30 September 2011, The Danish National Bank (the ”National Bank”) states that as of 1 October 2011 the bank has implemented a scheme according to which banks’ and mortgage-credit institutes’ access to collateralised credit facilities will be widened by expanding the present collateral basis to include banks’ and mortgage-credit institutes’ credit claims of good quality. Subsequently, credit claims may be used on the same terms as securities and cash for agreements on collateral security. The scheme is general. Preliminarily, the scheme is intended to apply indefinitely.

 

In connection with the adoption of the scheme, The Danish Financial Supervisory Authority has stated that, subject to certain conditions, banks and mortgage-credit institutes are entitled to include this expanded credit facility in their liquidity with a view to fulfil the requirement on a sensible liquidity pursuant to Section 152(1) of the Danish Financial Business Act (”DFBA”), also if the banks have not actually used the credit facility which the National Bank has made available, cf. Section 152(2) of DFBA. However, the liquidity requirement herein cannot be fulfilled fully or predominantly by means of credit guarantees, neither from the National Bank nor other parties.


Background for the expansion

The National Bank’s provision of loans to banks and mortgage-credit institutes is based on collateral by pledging of (i) securities – including state bonds and mortgage bonds – and (ii) loans.  The rules are more specifically described in the National Bank’s general provisions on documentation basis for money and monetary policy. It is in relation to the latter that the opportunity for collateral – and thereby the collateral basis – is now expanded.


The reason for the collateral basis for banks now being expanded in Denmark must be found in the banks’ limited possibilities of finding liquidity at the international loan market and, not least at the European market during the recent development at the financial markets which has triggered a renewed concern for a flare-up of the debt crisis.


Inspired by a number of other European countries’ finance practice where similar schemes provide the banks with a better access to liquidity, the National Bank now attempts to help the Danish banks. The aim of the initiative is to avoid – or at least limit – a situation in which the banks’ liquidity develops negatively concurrently with the tense financial situation at the European money market.


In the light of the above, the National Bank’s expansion must be considered a prevention of the problems in the financial sector whereby the banks’ survival is secured.


Legal basis

In a former press release from 16 August 2011, the National Bank stated that it is an amendment to the Securities Trading Act (”STA”) which has made it possible to expand the collateral basis for loans to banks. This refers to Part 18a of the STA on financial collateral and final settlement, more specifically in Section 58f of the STA.


However, it is not in connection with the latest amendment of the STA that the authority has been inserted, but by a bill from autumn 2010 which went into force on 1 January 2011. The bill implements the amendments to EU’s directive on financial collateral arrangements, pursuant to which collaterals for financial obligations by use of credit facilities may be made on the same terms as collateral by securities or cash.


The background to the amendment of the directive is that a need is deemed present – or at least expected to arise – for the financial businesses to be able to increase the number of assets which may be used as collateral in order to secure financial stability.


In continuation hereof, the European Parliament and the Council recognises that there is a need for banks to be able to use credit facilities as collateral, but that this will only be practically possible if it may take place in an easy and flexible way in accordance with the basis of the directive where the safeguard procedure is not notification, but instead submission of a list of the claims included. In practice, this is done by deviating from Section 31 of the Debt Instruments Act on notification as collateral in cases where the collateral provider and the collateral owner are not connected. This follows from Section 58a(2) of the STA.


The legal base for these amendments are thus of an earlier date. It was just not until 1 October 2011 that the National Bank began using the provision in practice.


Contents of the expanded scheme

The National Bank only accepts pledging of credit claims in the shape of simple claims such as credit claims or agreed overdrafts in kroner or euro whereas leasing agreements, subordinated debt, negotiable claims etc. may not be used as basis for pledging. Furthermore, it is required that the debtor for banks is domiciled in Denmark and is not a financial business.


Moreover, the customers of the credit claims which are provided as collateral for the banks’ loans with the National Bank must have status of either category 3 or category 2a in the quality categories of the Financial Supervisory Authority where the grade 3 is given to debtors for whom it is completely unlikely that the bank will suffer a loss from its credit claims, and the grade 2a is given to customers with a low probability of not being able to meet their obligations. The Financial Supervisory Authority is obligated to supervise and check that the categorisation is maintained subsequently. It is noted that, in connection with the credit facility, the National Bank will conduct a credit assessment of the credit claims granted and, in each case, these will be supplemented by an auditor’s statement.


The value assessment of the banks’ credit claims which may now be provided as collateral with the National Bank takes place based on the remaining debt. As regards agreed overdrafts, the value assessment is conducted with a deduction of 10%. Regardless of the type of claim, a deduction of 3% is conducted and furthermore, with deduction of debtor’s possible entitlement to set-off.  In this way the collateral basis is found. The collateral basis has no direct independent importance to the banks’ collateral with the National Bank, but is used as an intermediary result to find the collateral value which ultimately determines the banks’ credit facilities.


To calculate the collateral value, the collateral basis is deducted a haircut of 25% and a margin of 10%, that is 35% in total, and the collateral basis hereby calculated constitutes the value of the loans at the banks’ collateral to the National Bank. In this way the value of the banks’ credit claims which they must use for collateral with the National Bank is assessed.


Each month, the banks must update both the collateral basis and the collateral value and provide further collateral in case the latter drops more than 5%.


Moreover, the National Bank requires that the credit claim which is provided as collateral for the banks credit with the National Bank (i) has not been granted to a debtor who is a member of the bank’s board of directors or is in other ways closely related to the bank and (ii) may not be due for payment before a month after it having been provided as collateral. Also, a credit facility granted to a single debtor may maximum constitute 10% of the collateral basis.


Future implications

The National Bank’s initiative to expand the collateral basis for banks with credit claims must be seen in context with the also recent publication from the National Bank which expands banks’ and mortgage-credit institutes’ collateral basis further with a temporary access to take up loans in the National Bank against collateral in a number of new types of securities, including state-guaranteed unsecured debt, state-guaranteed senior debt and SPV bonds if certain conditions are met. In addition, credit may be granted with collateral in so-called sector company shares, that is shares in companies which the banks may own jointly, on condition that the requirements determined for these are met. The specific rules for these types of collateral can be found in the document “Addendum to the Provisions for Collateral for Credit in Danish kroner per 10 August 2011” of which it also appears that the expansion is in force until 30 December 2013.


Simultaneously with the launch of the new credit facility, the National Bank expands its monetary-policy instruments with a long credit facility according to which the National Bank’s monetary-policy counterparties, that is banks and mortgage-credit institutes, from 28 October 2011 may raise 6-month loans against collateral included in the National Bank’s collateral basis. The rate of interest on the loan follows the National Bank’s lending rate, 1.55% at present.


Overall, the schemes must be considered a helping hand to the banks in the Danish money market in the efforts to secure them the best possible economic terms of survival in the short as well as the long term. The scheme which expands the collateral basis as well as the credit facility are general and are aimed at all banks, regardless of size.


Even if the credit facility is expanded with a view to support banks and mortgage-credit institutes, the scheme is expected to involve some degree of insecurity for the banks to begin with, in that they, to a large extent, must themselves assess which of their credit claims are good and may be provided as collateral for funding in the National Bank. Nevertheless, it is the intention that the banks’ expanded credit facilities will benefit the entire bank sector in the long term, this applies specifically to the distressed banks just as, ultimately, business life will hopefully achieve easier access to capital. How and to which extent the addressees will actually embrace the schemes from the National Bank is for time to tell.



If you have any questions or require any additional information on the National Bank’s expansion of the collateralised credit facilities, please contact Partner Dan Moalem (dmo@mwblaw.dk), Attorney Lennart Meyer Østenfjeld (lmo@mwblaw.dk) or junior associate Mattias Vilhelm Warnøe Nielsen (mvn@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 of considerations.