EN ECB-P UBLIC  
 
 
OPINION OF THE EUROPEAN CENTRAL BANK 
of 9 November 2011  
on a loss guarantee in connection wi th an extended compensation scheme 
(CON/2011/90) 
 
Introduction and legal basis  
On 12 October 2011, the European Central Bank (ECB) received a request from the Danish Ministry of 
Business Affairs and Growth for an opinion on a law amending the Law on the Guarantee Fund for 
depositors and investors and the Law on tax assessment  (the issuance of a loss guarantee in connection 
with the use of an extended compensation scheme)1 (hereinafter the ‘draft law’). 
The ECB’s competence to deliver an  opinion is based on Articles 127(4) and 282(5) of the Treaty on the 
Functioning of the European Union and the sixth indent  of Article 2(1) of Council Decision 98/415/EC of 
29 June 1998 on the consultation of the European Ce ntral Bank by national authorities regarding draft 
legislative provisions2, as the draft law relates to the rules app licable to financial institutions insofar as 
they materially influence the stability of financial institutions and markets. In  accordance with the first 
sentence of Article 17.5 of the Rules of Procedure of the European Central Bank, the Governing Council 
has adopted this opinion. 
 1.
  Purpose of the draft law 
1.1 The draft law relates to the guarantee provide d by the Winding-Up Department of the Danish 
Guarantee Fund for Depositors and Investors3, which is a deposit-guarantee scheme (DGS) funded 
by the contributions by member banking institutions  (hereinafter the ‘Winding-Up Department of 
the Danish DGS’). This guarantee is given to the Financial Stability Company, a State-owned bridge bank, and cove rs potential losses resulting from r esolution procedures for banking 
institutions
4. The draft law will widen the scope of th is guarantee by allowing the Winding-Up 
Department of the Danish DGS to issue a gua rantee against losses incurred by the Financial 
                                                 
1  The Law on the Guarantee Fund for depositors and investor s, see Consolidated Law No 133 of 22 February 2011and the 
Law on tax assessment, see Consolidat ed Law No 1365 of 29 November 2010. 
2  OJ L 189, 3.7.1998, p. 42.  
3  The Winding-Up Department was set up  by Section 3 of Law No 712 of 25 June 2010 amending the Guarantee Fund for 
Depositors and Investors of 1 October 2010,  and is financially and organisationally se parate from the ordinary guarantee 
obligations of the Danish DGS. The capital of the Windi ng-Up Department is provide d entirely through mandatory 
contributions from the banking sector. See paragraph 1. 5 of the ECB Opinion CON/2010/45. All ECB Opinions are 
available on the ECB’s we bsite at www.ecb.europa.eu. 
4  See Section 2(a) of the Law on the Guarantee Fund for depositors and investors. 
ECB-P UBLIC  
2 Stability Company A/S where it provides capital and liquidity support to its subsidiary taking over 
the non-performing assets of a failing banking institu tion in the form of ‘bad bank’ arrangement. 
1.2 The winding-up process will be conducted in acco rdance with the extended compensation scheme, 
Model II, which was part of the political agreement (the so-called ‘Bank Pack age IV’) concluded in 
August 2011 and introduced by the Financial Co mmittee of the Danish Parliament in September 
20115. The resolution instruments introduced on th is occasion address the risk that small and 
medium-sized banking institutions  might encounter liquidity or solvency problems once their 
current individual guarantees provided by the Stat e expire in 2012 and 2013. More specifically, 
Model II of the extended compensation scheme est ablishes a regime under which the Financial 
Stability Company A/S, via the subsidiary company,  may wind up the unsound part of a distressed 
banking institution6. Under the draft law, Model II is cond itional on the Winding-Up Department of 
the Danish DGS issuing a guarantee to the Financ ial Stability Company A/S, which will cover any 
losses incurred after the final winding up of th e distressed banking institution. This guarantee 
ensures that the financial sector, via the Winding- Up Department of the Danish DGS, bears any 
loss stemming from the winding-up process and that no further burden is placed on the State by the 
expected losses related to individual State guarantees provided earlier to banking institutions. 
1.3 The draft law also amends the Law on tax assessm ent to ensure that the tax exemption under the 
current compensation scheme also comprises compensa tion disbursed to the subsidiary company of 
the Financial Stability Company A/S in connection with the winding-up of the unsound part of the 
distressed banking institution. 
 2. General observations  2.1 The ECB welcomes the introduction of a widene d loss guarantee scheme in connection with the 
extended compensation scheme, Model II, as th is initiative will improve the possibilities for 
handling banking institutions in distress and avoid any depositors or  other non-subordinated 
creditors incurring losses in connection with the resolution process. The ECB supports the 
arrangement under which the Winding-Up Department  of the Danish DGS, which is providing the 
loss guarantee to the Financial Stability Company A/ S, is organisationally and financially separate 
from the Guarantee Fund operated by the Danish DGS with the view to ensuring payouts of the guaranteed deposits. Such arrange ment is aligned with Directive 94/19/EC of the European 
Parliament and of the Council of 30  May 1994 on deposit-guarantee schemes
7 which requires 
                                                 
5  The compensation scheme was originally introduced in  April 2011 to provide greater incentives for sound banking 
institutions to take over distressed institutions. For a detaile d description of the extension of the compensation scheme, 
see document No 181 of 7 September 2011 of the Financial Committee of the Danish Parliament and the political 
agreement of 25 August 2011.  
6  Under Model II, a sound banking ins titution purchases the sound assets of th e banking institution under resolution, and 
funds obtained from this purchase are counted towards the wi nding-up of the banking institution under resolution. With 
the application of Model II no depositors  or other unsubordinated creditors incur losses, whereas shareholders and 
subordinated creditors are not covered by the compensation scheme. 
7  OJ L 135, 31.5.1994, p. 5. 
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3 deposit-guarantee schemes to be in a position to pa y duly verified claims by depositors in the 
periods specified by this Directive8.  
2.2 The ECB understands that the resolution process to  which the draft law relates will be conducted in 
accordance with Union State aid rule s in respect of the legal require ment for banking institutions to 
contribute financially to the extended functions of  the Winding-Up Department of the Danish DGS 
and in respect of the involvement of the Stat e-owned Financial Stability Company A/S in the 
resolution process. In addition, the ECB understand s that Document No 181 of 7 September 2011 
of the Financial Committee of the Danish Par liament establishing the extended compensation 
scheme has already been notified to the Commission and that a similar notification will be made in 
relation to the draft law. 
 This opinion will be published on the ECB’s website.    Done at Frankfurt am Main, 9 November 2011. 
 
[signed] 
 
The President of the ECB 
Mario DRAGHI 
                                                 
8  See Article 10(1) of the Directive 94/19/EC.