EN 
 
 
OPINION OF THE EUROPEAN CENTRAL BANK 
of 26 January 2009 
at the request of the Danish Ministry of Economic and Business Affairs  
on a proposal for a Law on State investments in credit institutions and a proposal for a Law 
amending the Law on financial stability  
(CON/2009/6) 
 Introduction and legal basis
 
On 21 January 2009 the European Central Bank (ECB ) received a request from Danmarks Nationalbank 
on behalf of the Danish Ministry of Economic and Business Affairs for an opinion on a proposal for a Law on State investments in credit institutions and a proposal for a Law amending the Law on financial 
stability (hereinafter together the ‘draft laws’). 
The ECB’s competence to deliver an  opinion is based on Article 105(4) of the Treaty establishing the 
European Community 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 provisions
1, as the draft laws relate to rules applicab le to financial institutions insofar as they 
materially influence the stability of financial ins titutions 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 proposals 1.1 The draft laws are motivated by the current financ ial market crisis and together take the form of a 
banking package to strengthen the capital base of cr edit institutions and mortgage credit institutions 
(hereinafter the ‘credit institutions’). The aim is to provide financial robustness to ensure financing 
for the activities of sound businesses and househol ds, and at the same time to strengthen the 
confidence of businesses and households in the financial sector. 
1.2 The draft laws will establis h a regime under which credit institutions can apply for capital 
injections from the State. The capital injections will be provided in the form of tier-1 hybrid core 
capital subject to the conditions  specified in the draft laws. 
                                                 
1  OJ L 189, 3.7.1998, p. 42.  
2 1.3 The Law on financial stability of 10 October 20 08 established a State guarantee scheme for simple 
creditors and depositors, and is currently limite d to two years, expiring on 30 September 20102. 
The proposal for a Law amending the Law on financial stability introduces a three-year 
extension/transitional State guarantee regime fo r credit institutions to beyond 30 September 2010 
combined with phasing out of the guarantees over th is period. Under the new transitional scheme, 
credit institutions may until 31 December 2010, on an individual basis, apply for a State guarantee for specific issues of new unsecured debt and for supplementary collateral requirements for issues 
of junior covered bonds of up to three years’ ma turity. Under the proposal, the State guarantee will 
also be open to mortgage credit institutions fo r their covered bonds business. In addition, the 
proposal also gives the Company for winding-up dist ressed banks (hereinafter the ‘WUC’) a wider 
range of instruments to facilitate the winding-up  process. The proposal makes it clear that the 
general and unconditional State guarantee under the current Law on financial stability will expire 
on 30 September 2010
3, to be replaced by the modified tr ansitional regime laid down in the 
proposal and by the regime introdu ced by the proposal for a Law on State investments in credit 
institutions.  
1.4 The proposal for a Law on State investments in cr edit institutions establishes a scheme under which 
the State will be allowed to provide credit instituti ons in Denmark with hybrid core capital (capital 
investment) and to issue underwriting guarantees. As  a corollary to the supply of State lending and 
guarantees, the credit package restricts the financial legislation in a number of ways, inter alia  by 
setting limits for the variable part of remunera tion for board members of credit institutions making 
use of the State support scheme, as well as prohibitions or restrictions on dividend payments and on capitalisation of undertakings within a group other than credit institutions. 
1.5 The proposal for a Law on State investments in credit institutions applies to Danish credit 
institutions and to subsidiaries of foreign credit in stitutions located in Denmark, but not to foreign 
subsidiaries of Danish credit institutions. Accordi ng to the terms and conditions for investments of 
hybrid core capital, ‘subsidiaries of foreign financ ial groups shall, as far as possible, use the capital 
provided to secure consolida tion and lending in Denmark’. 
1.6 The State capital injected as tie r-1 hybrid core capital into cr edit institutions is intended as a 
temporary interest-bearing loan. The interest rate  will be determined individually for each credit 
institution, on the basis of objective criteria on th e assessed risk connected with the loan, and is 
estimated to be in the range of 9 to 12 % a nnually, and on average about 10 %. According to the 
general commentary on the draft law, it is intende d that the terms will provide sufficient economic 
incentives for credit institutions to replace the State loans with private capital.  
1.7 As an alternative to the injecti on of hybrid core capital, credit institutions will have the option of 
applying for a State guarantee underwr iting the raising of private capital. 
                                                 
2 See paragraph 2.1 of this opinion and also ECB Opini on CON/2008/54 of 17 October 2008 at the request of the Danish 
Ministry of Economic and Business Affairs on a proposed Law on fi nancial stability.  
3  See § 1(11) of the proposal. 
3 2. General observations 
2.1  ECB Opinion CON/2008/54 could not be taken into consideration before the adoption of the 
proposed Law on financial stability on 10 Octobe r 2008. This new consultation concerns an 
amendment to the Law on financial stability and the ECB therefore reiterates the position it has 
previously communicated in ECB Opinion CON/2008/54. Moreover, to the extent that the current proposal for a Law amending the Law on financia l stability does not properly address the issues 
raised in ECB Opinion CON/2008/54, and that these continue to be relevant in the light of subsequent developments, the ECB’s vi ews in that opinion remain valid.  
2.2  In the general commentary on the draft laws, it is  pointed out that: (i) whereas the State guarantees 
under the Law on financial stability were meant as a short term measure to unfreeze credit-giving, 
and were to end by 30 September 2010, deve lopments on the financial markets still create 
insecurity as to whether and under which conditions  it will be possible for credit institutions to 
raise capital when the State guarantee expires, m eaning that there remains a need to secure the 
medium-term raising of liquidity; (ii) credit ins titutions have considerab le funding difficulties and 
may be forced to reduce their lending, thereby worsening the economic downturn; and (iii) the 
Danish financial stability scheme was agreed be fore any coordinated action was agreed at 
European level among the euro area Member States by the Paris Agreement of 12 October 2008, which was later confirmed by the European Coun cil. Since then several Member States have 
adopted schemes of up to five years duration, wh ich the Law on financial stability does not allow, 
thereby putting Danish credit institutions at a disadvantage in raising capital.  
2.3  Moreover and in particular in line with the Declaration of 12 October 2008
4 made at the summit of 
the euro area Member States in Paris, the ECB not ed that EU Member States have to act in a 
coordinated manner to avoid significant di fferences in national implementation having a 
counterproductive effect, creating distortions in global banking markets. In particular, the ECB 
notes that uncoordinated decisions to guarantee in terbank deposits in some Member States should 
be avoided as they may involve a fragmentation of money markets5. 
 3. Specific observations 
Draft law amending the Law on financial stability 
3.1  The ECB appreciates that the unlimited State guarantee will expire on 30 September 2010 as 
originally provided for in the existing Law on fi nancial stability, and that the proposal for an 
                                                 
4  See the Declaration of 12 Octobe r 2008, available on the website of the French Presidency, www.ue2008.fr. 
5  See paragraph 2.3 of ECB Opinion CON/2008/54. See othe r ECB opinions on interbank deposits (e.g. ECB Opinions 
CON/2008/46 of 8 October 2008 at the request of the Belg ian Ministry of Finance on a preliminary draft law on 
measures promoting financial stability a nd in particular establishing a State guara ntee for the provision of credit in the 
context of financial stability, CON/2008/52 of 17 October 2008 at the request of the Spanish State Secretary for 
Economic Affairs on a Royal Decree-Law cr eating a Fund for the acquisition of fina ncial assets and a Royal Decree-Law 
adopting urgent financial and economic m easures in relation to the concerted Eu ropean action plan of the euro area 
countries and CON/2008/76 of 25 November 2008 at the request  of the Slovenian Ministry of Finance on a draft law 
amending the Law on public finance). 
4 extension/transitional arrangement or phasing out after 30 September 2010 under the proposal for a 
Law amending the Law on financial stability will ba se such extension or transitional arrangement 
on the assessment of specific issues of unsecured debt instruments by each individual credit 
institution. However, the ECB reiterates its view, in line with its recent opinions, that the State 
guarantee under the existing scheme should not cove r interbank deposits. Indeed, such guarantees 
have the potential to interfere with the conduct of  a central bank’s liquidity-providing operations, 
and therefore in this case the transmission of the monetary policy decisions of Danmarks Nationalbank.  
3.2  The ECB notes that th e transitional scheme will also apply to State guarantees for supplementary 
collateral required for the issuance by mortgage  credit institutions of covered bonds, with the 
objective of creating a level playing field. Furtherm ore, regarding the three-year extension of the 
guarantee scheme, the ECB emphasises, in line with  the Declaration of 12 October 2008, that 
harmonisation regarding the expiry  of national financial support schemes across the EU is of 
crucial importance. 
3.3  Whereas the State guarantee scheme for credit institutions will be limited to a three-year 
transitional scheme and also contains a considerable  own risk element borne by the financial sector, 
the proposal for a Law on State investment in cred it institutions does not contain similar explicit 
exit rules. According to the general commentary,  State investment is only meant to be of a 
temporary nature, with sufficient economic incen tives for the credit institutions to replace State 
capital with private capital. In line with previous ECB opinions
6, it should be ensured that such 
measures are in accordance with the requirements of Community competition law, in particular 
State aid rules, and that the State’s role is lim ited in time. In this respect, the draft Law on State 
investment in credit institutions should set out in more precise terms the incentives that will be put 
in place for the redemption or conversion of the instruments either on the basis of a period of time or the development of market conditions. This w ould serve to ensure the temporary nature of the 
State’s involvement and discourage financial institu tions from maintaining such involvement for an 
extensive period of time. 
3.4  According to the proposal for a Law amendi ng the Law on financial stability, credit institutions 
will pay a fee for the State guarantee to be dete rmined individually for each credit institution
7. 
Those credit institutions which are members of th e Private Contingency Association already pay a 
fee for the currently available guarantee, and for the period after 30 September 2010 they will have 
to pay a fee to cover new issues.  
                                                 
6  See e.g. paragraph 3.8 of ECB Opinion CON/2008/68 of 13 N ovember 2008 at the request of the Finnish Ministry of 
Finance on a draft government proposal for laws amending the Law on the Government Guarantee Fund and the Law on 
credit institutions. 
7  See Article 1(10) on § 16c(4) of the proposal. 
5 Draft law on State investments in credit institutions 
3.5  The proposal for a Law on State investment in  credit institutions is very broadly formulated 
regarding the terms and c onditions for agreements on such inv estment, and specifically leaves it to 
the Minister for Economic and Business Affairs to  lay down detailed rules regarding the terms and 
conditions as well as rules for calculating the re muneration of such investment. The commentary 
on the proposal contains some guidelines and assu mptions regarding the remuneration, but for 
reasons of legal clarity these should also be reflected in the text of the draft law itself. 
3.6  The ECB notes that the recapitalisation measur es considered in Member States are aimed at 
strengthening the capital position of fundamentally sound financial institutions , in order to improve 
the functioning and stability of the banking system  and to ensure the proper financing of the 
economy. In particular, a consistent approach should be used in defining the conditions for 
recapitalisations and the pricing of the instrument s intended to provide tier-1 capital to financial 
institutions. The ECB underlines the importance of  appropriate pricing for recapitalisations to 
reflect the goals of enhancing the stability of th e financial system, facilitating a return to normal 
market conditions and ensuring the proper financing of the economy8. Against this background, the 
Governing Council of the ECB has formul ated recommendations on the pricing of 
recapitalisations9. In particular, the pricing conditions fo r capital support should be risk-based and 
market-oriented, determined by taking into cons ideration the specific risk of both the specific 
instrument chosen for injecting capital and the in stitution concerned. Specific features of the 
instruments for capital injections should be approp riately chosen so that, while encouraging an 
early end to the State’s capital support of banks, they should not result in an excessive increase in 
the cost of capital.  
3.7  Furthermore, pursuant to Chapter 2 paragraph 3 of the proposal for a Law on State investments in 
credit institutions, credit institutions that receive capital investment in accordance with this law 
must, following the capital investment, have a core cap ital at the time of recapitalisation of at least 
12 %. In this respect, the ECB acknowledges that th is provision is compliant with the EU Council 
Conclusions of 20 January 2009 on Bank Capital wh ich state that ‘the provision of capital to the 
banking sector is not intended to create new, hi gher statutory capital requirements for the banking 
sector. Banks’ capital requirements should continue  to be assessed on a case-by-case basis, in line 
with existing EU regulation, based on their indivi dual risk-profile and rigorous stress-testing. It 
should be recognised that capital provides a buffer both to withstand the challenging economic conditions and to maintain le nding to creditworthy borrowers’
10. 
                                                 
8  See e.g. ECB Opinion CON/2009/3 of 8 January 2009 at the request of the Slovenian Ministry of Finance on a draft 
decree laying down criteria and conditi ons for the implementation of State capita l investments and for the conversion of 
State claims into capital shares under Article 81.a of the Law on public finance. 
9  See the Recommendations of the Governing Council of the Euro pean Central Bank on the pricing of recapitalisations  
issued on 20 November 2008, available on the ECB’s website at www.ecb.europa.eu. 
10  Cf the Council conclusions on bank capital, as adopt ed by the Council (ECOFIN) on 20 January 2009. 
6 3.8  The ECB wishes to underline the importance it attaches to ensuring that the Law on State 
investments in credit institutions, and any subseque nt executive orders, are in line with generally 
agreed principles for recapitalisation measures and preserve a level playing field as described 
above in line with the recommendations e xpressed in several recent ECB opinions.  
State guarantee and the prohibition on monetary financing 3.9 ECB Opinion CON/2008/54 noted that the State will be the sole owner of the WUC
11,which will be 
able to borrow to cover its financing needs12, and that the WUC should not be allowed to benefit 
from any type of lending or overdraft facilities fro m Danmarks Nationalbank to ensure compliance 
with the prohibition on monetary financing. Danm arks Nationalbank had confirmed that it did not 
intend to lend or provide any financing to the WUC13. It is noted that the provision of emergency 
liquidity assistance is a central bank function, wh ich consists in giving support in exceptional 
circumstances and on a case-by-case basis to tem porarily illiquid but solvent credit institutions14. 
4. In the proposal for a Law on State investment in  credit institutions, the Minister for Economic and 
Business Affairs can draw on the State’s account w ith Danmarks Nationalbank for the payment of 
hybrid core capital to those credit institutions with  which such an agreement is made. The cost will 
be included immediately in the current supply law15. The ECB understands that the express 
indication in the proposal that the cost of supplying hybrid core capital will be included 
immediately in the current supply law will ensu re compliance with the prohibition on monetary 
financing. 
 This opinion will be published on the ECB’s website.    Done at Frankfurt am Main, 26 January 2009. 
 
[signed] 
 
The President of the ECB 
Jean-Claude TRICHET 
                                                 
11  See § 3 of the Law on financial stability. 
12  See § 3(2) of the Law on financial stability. 
13  See paragraph 3.2 of ECB Opinion CON/2008/54. 
14  See ECB Opinion CON/2008/42 of 10 September 2008 at the request of the Banque centrale du Luxembourg on 
amendments to the draft law improving th e legislative framework for Luxembourg as  a financial centre and amending the 
Law of 23 December 1998 on monetary status  and on the Banque centrale du Luxembourg. 
15  See § 2(2) of the proposal for a Law on State investment in credit institutions.