Opinion of the European Central Bank of 09 March 2000 at the request of the Danish authorities on a draft Act amending the Depositors’ and Investors’ Guarantee Fund Act (CON/00/06)
Date: 2000-03-09
Institutions: European Central Bank
Subjects: Denmark, bank deposit, credit institution, financial stability, guarantee, national law, public institution

9 March 2000

OPINION OF THE EUROPEAN CENTRAL BANK

of  09 March 2000

at the request of the Danish authorities on a draft Act amending

the Depositors’ and Investors’ Guarantee Fund Act

(CON/00/06)

1. 

On  9  February  2000  the  European  Central  Bank  (ECB)  received  a  request  from  Danmarks

Nationalbank, on behalf  of  the  Ministry  of  Economic  Affairs, for  an  ECB  Opinion  on  a draft

Act amending the Depositors’ and Investors’ Guarantee Fund Act (hereinafter referred to as the

“Draft Law”). 

2. 

The ECB’s competence to deliver an Opinion is based on Article 105 (4), second indent, of the

Treaty  establishing  the  European  Community  (hereinafter  referred  to  as  the  “Treaty”)  and

Article 2 (1),  sixth  indent,  of  Council  Decision  No.  98/415/EC  of  29  June  1998  on  the

consultation  of  the  European  Central  Bank  by  national  authorities  regarding  draft  legislative

provisions, as the Draft Law contains rules applicable to financial institutions which could have

a  material  influence  on  the  stability  of  financial  institutions  and  markets.  In  accordance  with

Article  17 (5),  first  sentence,  of  the  Rules  of  Procedure  of  the  European  Central  Bank,  this

Opinion has been adopted by the Governing Council of the ECB. This Opinion is based on an

unofficial English translation of the relevant provisions of the Draft Law.

3. 

The  ECB  understands  that  the  main  purpose  of  the  Draft  Law  is  to  increase  the  freedom  of

choice  of  the  Depositors’  and  Investors’  Guarantee  Fund  (hereinafter  referred  to  as  the

“Guarantee Fund”) with regard to its methods for dealing with crisis management, on the one

hand, and to provide for new rules for decision-making by the board of the Guarantee Fund, on

the other. These draft amendments are understood to be necessary in order to avoid uncertainties

with  the  European  Community  rules  concerning  state  aid.  In  this  sense,  the  amendments  are

intended  to  facilitate  a  swift  and  simple  administrative  procedure  for  the  intervention  of  the

Guarantee Fund, as a private and independent entity, in the reorganisation of credit institutions

or investment firms, with full respect of competition rules.

4. 

The ECB welcomes the Draft Law and in particular the underlying aim of reinforcing a market-

based mechanism for handling situations of crisis relating to credit institutions and investment

firms in Denmark. The new rules being introduced in the Depositors’ and Investors’ Guarantee

Fund  Act,  while  enhancing  the scope  of the functions  of the  Guarantee  Fund,  will  ensure  the

observance of certain principles of fair competition, such as transparency of procedures, equal

treatment and non-discrimination between credit institutions  or investment firms.  At  the same

time,  it  should  be  noted  that  the  intervention  of  the  Guarantee  Fund  will  not  involve  public

money, even though it will certainly contribute to the stability of the financial system as a public

good. This should strengthen awareness that the safeguards provided by the industry itself, and

not the access to public resources, are expected to contain the effects of a crisis. In this manner,

it  should  also  have  a  positive  influence  on  the  management  and  control  of  risks  by  market

participants.

5. 

The ECB notes that, according to Article 1 (1), Sections 3 and 4, together with Article 1 (2) of

the Draft Law, the  Guarantee  Fund  must  reimburse depositors  and investors of  a  given  credit

institution or investment firm in the event of a suspension of payments or bankruptcy. In cases

where the suspension of payments or bankruptcy has not occurred, but where such institution or

firm no longer fulfils the conditions necessary for commercial activity, the Guarantee Fund has

the  option  of  contributing  to  the  liquidation  of  such  institution  or  firm  by  providing  non-

subordinate  creditors  with  financial  assistance  or  guarantees.  This  latter  option  may  only  be

selected if it is viable and is estimated to incur a lower cost for the Guarantee Fund. Therefore,

according to the ECB’s understanding, the Draft Law indicates that the Guarantee Fund should

take a decision on the basis of the Fund’s own best interests. Against this background, the ECB

understands  that  the  Guarantee  Fund,  when  selecting  the  appropriate  option,  has  to  take  into

consideration the circumstances of the specific case in question. In this sense, the ECB suggests

that the supervisory authority shall provide adequate information to the Guarantee Fund on the

specific case in order for it to be able to assess which solution will involve the lowest cost for

the  Fund.  The  involvement  of  this  public  authority  should  not,  however,  imply  any  sort  of

instructions  to  the  Fund,  which  in  all  cases  shall  remain  independent  and  assume  final

responsibility for its decisions. 

6. 

Accordingly,  the  ECB  notes that  Article  1 (2),  Section  4,  of  the  Draft  Law  stipulates  that  the

Minister  of  Economic  Affairs  shall  determine  the  rules  governing  co-operation  between  the

Danish Financial Supervisory Authority (Finanstilsynet) and the Guarantee Fund, as well as the

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rules  governing  the conditions for  takeover  bids. The  ECB  therefore  notes  that the  Guarantee

Fund  will,  in  certain  situations,  play  a  prominent  role  in  the  crisis  management  of  credit

institutions and investment firms in Denmark. Thus the ECB welcomes in this regard the fact

that there are rules  in  place  regarding  co-operation  between the  Danish  Financial  Supervisory

Authority  and  the  Guarantee  Fund,  and  also  that  a  public  authority  such  as  the  Ministry  of

Economic  Affairs  will  be  laying  down  the  rules  for  this  co-operation  as  well  as  for  takeover

bids.  Clarification  of  the  roles  of  the  competent  authorities  and  of  the  co-ordination  of  such

roles vis-à-vis the market-based intervention of the Guarantee Fund can only contribute to the

framework in place for the stability of the financial system.

7. 

The  ECB  notes  that  Article  1 (2)  of  the  Draft  Law  provides  the  Guarantee  Fund  with  the

discretion  to  contribute  to  the  liquidation  of  a  credit  institution  or  an  investment  firm  by

providing the non-subordinate creditors of such institution or firm with financial assistance or

guarantees. The suitability of these measures for obtaining takeover bids, based on the market

price  for  such  institution  or  firm,  should  be  taken  into  consideration  by  the  Guarantee  Fund.

Moreover, such measures can be implemented in connection  with others. The  ECB  notes that

these measures may give the Guarantee Fund a considerable influence over the running of the

institution  or  firm  in  question.  The  Guarantee  Fund  is,  however,  according  to  the  Draft  Law,

prohibited from becoming the owner of such institution or firm, even for a short period. 

8. 

The ECB notes that, according to Article 1 (4) of the Draft Law, a board member may veto the

participation  of  the  Guarantee  Fund  in  the  reorganisation  of  a  credit  institution  or  investment

firm, if the member in question represents the same category of such institution or firm as the

one which has failed. The majority of the board members of the Guarantee Fund represent the

different categories of credit institutions and investment firms, which are covered by the deposit

and investor guarantee arrangement. Consequently, the Guarantee Fund cannot contribute to the

reorganisation  of  a  credit  institution  or  investment  firm  without  the  agreement  of  the

representative of the sector in question. 

.

9. 

The ECB confirms that it has no objection to this Opinion being made public by the competent

national authorities at their discretion.

Done at Frankfurt am Main on 9 March 2000.

The President of the ECB

[signed]

Willem F. Duisenberg

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