EN ECB-P UBLIC  
 
 
OPINION OF THE EUROPEAN CENTRAL BANK 
of 24 May 2011  
on the introduction of a compensation scheme for distressed banking institutions 
(CON/2011/45) 
 
Introduction and legal basis  
On 29 April 2011, the European Central Bank (ECB) re ceived a request from the Danish Ministry of 
Economic and Business Affairs for an opinion on a draft law amending the Law on a guarantee fund for depositors and investors, the Law on financial stab ility, and the Law on payment of State income tax 
(introduction of a compensation scheme for distressed banking institutions)
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 provides for a scheme to transfer  the assets and liabilities of a distressed credit 
institution to another financially sound credit ins titution, by allowing the Danish Guarantee Fund 
for Depositors and Investors (hereinafter ‘the F und’) to provide funds or a guarantee covering all 
unsubordinated creditors of this distressed credit in stitution as further specified in the Notes on the 
draft law.  
1.2 The draft law will amend the Law on a Guarantee Fund for Depositors and Investors, the Law on 
financial stability, and the Law on payment of State income tax, and will establish a compensation scheme for distressed banking institutions. It will thereby amend the Law on amendments to the 
                                                 
1  Law on a guarantee fund for depositors and investors, cf . Consolidated Law No 133 of 22 February 2011; Law on 
financial stability, cf. Consolidated Law No 875 of 15 September 2009, §7 of Law No 1273 of 16 December 2009, §1 of 
Law No 721 of 25 June 2010, and §14 of Law No 1556 of 21 December 2010; and Law on payment of State income tax, 
cf. Consolidated Law No 1365 of 29 November 2009. The scheme introduced by the draft law is partially a 
reintroduction of a Danish scheme that existed until 2007, but in the light of Union State aid rules at that time was 
considered inoperative. The Danish term for this possib ility of compensating an acquiring bank is known as a ‘dowry’ 
scheme, which is also the subtitle of the Danish version of the present draft law. The unofficial English version is 
available on the website  of the Danish FSA at http://www.ft net.dk/en/Regler-og-praksis.aspx. 
2  OJ L 189, 3.7.1998, p. 42.  
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2 2010 financial stability regime, Bank Package III, on which the ECB gave its opinion on 28 May 
20103.  
1.3 The scheme set up by Bank Package III on 1 Oc tober 2010 established a more permanent and 
general regime for handling distressed banking in stitutions to replace the general Danish State 
guarantee scheme for ordinary individual credito rs and depositors which expired on 30 September 
2010. It introduced a controlled winding-up mechanis m of a distressed credit institution through the 
Financial Stability Company (hereinafter the ‘Com pany’) compared to the traditional and often 
lengthy winding-up procedures and compulsory sales in a bankruptcy. This winding-up mechanism is activated where a credit institution is unable to  meet the capital adequacy requirements and the 
credit institution then has the option either to tr ansfer its activities to a buyer designated by the 
Company or to enter normal bankruptcy proceedin gs with the clear aim of winding it up and of 
transferring existing customers to other instituti ons. The Company injects capital into the new 
subsidiary in accordance with th e capital adequacy requirements of the Law on Danish financial 
business. If more liquidity is required than can be  raised in the central bank’s regular market 
operations, the Company can provide a liquidity f acility, to ensure that the liquidity adequacy 
requirements are met. The injected capital will earn a market return, to be borne by the subsidiary.  
1.4 As the second and separate element of the winding-up regime, the Fund has set up a Winding-Up 
Department of the Guarantee Fund, separated by  Chinese walls from the Fund’s ordinary guarantee 
obligations. The Winding-Up Department may guara ntee loans for the capitalisation and liquidity, 
and it will bear any losses incurred through the winding-up. The capital of the Winding-Up Department will be provided th rough guarantees from Danish ba nking institutions. Where the 
capital requirements exceed the guarantees, the Windi ng-Up Department can raise loans guaranteed 
by the State
4.  
1.5 The draft law5 has the aim of overcoming practical difficulties of Bank Package III by facilitating 
the identification of market-based solutions for distressed banking institutions no longer fulfilling 
the capital requirements of the Danish Financia l Supervisory Authority (FSA). The draft law 
includes the possibility for the Guarantee Fund for Depositors and Investors to provide financial 
assistance and/or guarantees for all unsubordinated cr editors to another institution in connection 
with the complete transfer of the business of th e distressed credit institution. The conditions are (1) 
that it has proved impossible to find any private, market-based solution; (2) that this solution is 
economically more advantageous to the Guarant ee Fund than the existing alternatives of winding-
                                                 
3  See Opinion CON/2008/54. Since the start of the financial cr isis in 2007 Denmark had previously introduced three major 
laws and amendments on which ECB ha s been consulted. See Opinion C ON/2009/6, and Opinion CON/2010/45. All 
ECB opinions are published on the E CB’s website at www.ecb.europa.eu. 
4  According to the existing § 6, subsection 5 of the Law on a guarantee fund for depositors and investors, the Minister for 
Economic Affairs may, with the approval of Parliament’s Fi nance Committee, provide a guarantee for a loan made to the 
Fund to meet its commitm ents. With the creation of the new and separate  winding-up department of  the Fund, a similar 
possibility of taking out a loan with the approval of the Fina nce Committee will also be provided for, if the resources of 
this department should not suffice to cove r the winding-up obligati ons of the Fund.  
5  The draft law leaves it to the Minister to decide on the date of its entry into force, and according to the Notes on the draft  
law this is to allow for the time needed for the Commission to consider the compatibility of the draft law with Union 
rules - see the General notes 8. Union law an d the Notes on individual provisions, No 4. 
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3 up and insolvency proceedings under the Financial St ability Company; (3) that a transfer to another 
institution is deemed by the FSA to be financially  and managerially sustainable in the longer term 
for carrying on the business of the failed institution by the acquirer; and (4) that it is compatible 
with Danish and Union rules on competition and St ate aid. The financing of the new compensation 
scheme will be fully borne by the banking sect or and has no budgetary consequences for the 
Danish State6. As with the existing scheme, the Danish Stat e will continue to bear the residual risk 
of a State guarantee, if the FSA considers that  the Fund needs to take up loans on the capital 
markets to provide sufficient funds.  
1.6 The Chair and banking sector representatives of th e Fund need a unanimous decision on providing 
compensation from the Fund for a market-based transfer  of the distressed credit institution, in order 
to prevent any discrimination and distortion of co mpetition, and it is for the Company to execute 
such decision, which may make its execution co nditional on a transparent bidding procedure open 
to all interested parties7.  
 2. General observations  
The consultation process both in relation to the ECB a nd to Danish authorities and market participants 
was launched simultaneously with the presentation of the draft law to Parliament on 29 April 2011
8. The 
consulting authority has set a deadline of 10 May 2011 for the receipt of the ECB’s opinion and has 
informed the ECB that the draft law is urgent because of the intention of having it adopted before the end 
of the current parliamentary year. Although the cons ulting authority appears to invoke the exemption 
provided for in Article 3(2) of Decision 98/415/E C, which allows for a reduction below the minimum 
time limit for submission of the ECB’s opinion of on e month in case of extreme urgency, the ECB finds 
that sufficient argumentation for such urgency has not been adduced. Furthermore, the ECB draws the 
consulting authority’s attention to the second sentence of Article 4 of Decision 98/415/EC that provides 
that the ECB must be consulted ‘at an appropriate stag e’ in the legislative pro cess. This implies that the 
consultation should take place at a stage in the legisl ative process that affords th e ECB sufficient time to 
examine the draft legislative provisions and to adopt  its opinion in the require d language versions at a 
point in time which also enables the relevant national authorities to take the ECB’s opinion into consideration before the legisl ative provisions are adopted.  
 3. Specific comments 
3.1 The ECB welcomes the fact that the compensation scheme does not entail any further engagement 
by the State in the winding-up of distressed banki ng institutions, but that the new scheme will be 
fully based on financing by the banking sector.  
                                                 
6 See the General Notes on the draft law.  
7  See the General Notes, 3.1.  
8  On 27 April 2011 the Ministry sent the draft law on the compensation scheme.to the ECB with information on the 
presentation and general hearing of the draft law on 29 April 2011.  
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4 3.2 The ECB also welcomes that - as stated in the Ge neral Notes on the draft law - a credit institution 
for which the FSA has set a deadlin e to fulfil the solvency criteria must first seek a market-based 
solution. According to this approach, a compen sation scheme is a subsidiary measure where the 
credit institution considers that it has lost its capital or  either is or must expect to be insolvent; it is 
only available where the credit institution’s own e fforts to find a market-based solution have 
proved unsuccessful.  
3.3 The ECB supports the rules for the transfer of  the failed credit institution to another credit 
institution and the provision of funds for its transfer as set out in the Notes9, which lay down that it 
must take place on a market-conforming basis. Further, the ECB welcomes the detailed measures 
prescribed to ensure that a transfer and economic  assistance are in accordance with the principle of 
non-discrimination and on market terms, and that  a market-based bidding procedure must be 
launched where several banking ins titutions have expressed a potentia l interest in taking over the 
distressed institution10.  
3.4 Furthermore, the ECB welcomes that the Fund will operate on a least-cost basis, i.e. that it will 
only participate in the winding-up of a credit in stitution by providing funds or guarantees to cover 
all the credit institution’s unsubordinated creditors, wh ere this is assessed to be the cheaper solution 
for the Fund compared to other options.  
3.5 The ECB supports the Chinese walls between the F und and the Fund’s Wind ing-up Department to 
safeguard depositor’s interests. In principle, a wi nding-up facilitation should not lead to the bailout 
of the failed credit institution.  
3.6 The ECB notes that the new compensation scheme is in line with the European Commission’s 
plans for a directive on guarantee schemes that will provide more crisis management tools11. 
 This opinion will be published on the ECB’s website.   Done at Frankfurt am Main, 24 May 2011. 
 
 
[signed] 
 
The Vice-President of the ECB 
Vítor CONSTÂNCIO 
                                                 
9  See Notes on individual provisions, 2. 
10  See Notes on individual provisions, 2, subsection (2). 
11  See General Notes, 8. Union law, third paragraph.