Opinion of the European Central Bank of 17 October 2008 at the request of the Danish Ministry of Economic and Business Affairs on a proposed Law on financial stability (CON/2008/54)
Date: 2008-10-17
Institutions: European Central Bank
Subjects: Denmark, State aid, credit institution, financial stability, guarantee, national law

EN 

OPINION OF THE EUROPEAN CENTRAL BANK 

of 17 October 2008 

at the request of the Danish Ministry of Economic and Business Affairs 

on a proposed Law on financial stability 

(CON/2008/54) 

Introduction and legal basis 

On  9  October  2008  the  European  Central  Bank  (ECB)  received  a  request  from  the  Danish  Ministry  of 

Economic  and  Business  Affairs  for  an  opinion  on  a  proposed  Law  on  financial  stability,  which  was 

adopted on 10 October 2008 (hereinafter the ‘Law’). Given the turbulence in the international financial 

markets, the consulting authority requested the ECB to provide its opinion urgently. 

The  ECB’s  competence  to  deliver  an  opinion  is  based  on  Article  105(4)  of  the  Treaty  establishing  the 

European Community and on the sixth indent of Article 2(1) of Council Decision 98/415/EC of 29 June 

1998 on the consultation of the European Central Bank by national authorities regarding draft legislative 
provisions1,  as  the  Law  relates  to  rules  applicable  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 Law 

1.1    The  Law  is  motivated  by  the  current  financial  market  crisis.  It  introduces  a  special  resolution 

regime for banks affected by financial difficulties and ensures that all domestic and foreign claims 

by  depositors,  debt  holders  (senior  debt)  and  other  ordinary  creditors  in  relation  to  banks  and 

savings  banks  in  Denmark  are  fully  covered  by  a  State  guarantee  from  5  October  2008  until 
30 September 20102. Only creditors in relation to covered bonds and holders of subordinated debt 

(hybrid core capital and subordinate loan capital) are excluded from the State guarantee.  

1.2   The Law implements the political agreement on financial stability of 5 October 2008 between the 

Danish  Government,  the  financial  sector  and  the  majority  of  political  parties  represented  in  the 
Danish  Parliament  (Folketinget)3.  That  political  agreement  states  that  the  Danish  financial  sector 

1  
2  
3  

OJ L 189, 3.7.1998, p. 42.  
See Sections 1(1) and Section 16(1) of the Law.  
Available on the website of the Ministry of Economic and Business Affairs, www.oem.dk. 

 
 
 
 
                                                 
should  demonstrate  moderation,  implying  for  example  that  a  more  moderate  approach  should  be 

taken  in  future  to  management  remuneration  within  credit  institutions,  and  it  should  also  aim  at 

consolidation over the next two years.  

1.3  The  guarantee  scheme  set  up  under  the  Law  supplements  the  existing  Deposit  and  Investor 

Insurance  Scheme,  which  transposed  the  EU  Directives  on  depositor  guarantee  and  investor-
compensation schemes4. It also widens the scope of operation of the existing Private Contingency 

Association  (PCA),  an  association  set  up  and  administered  by  the  Danish  financial  sector,  which 

may  draw  on  guarantees  given  by  its  members  for  the  purpose  of  winding  up  ailing  credit 

institutions. Such guarantees currently amount to DKK 750 million per year. Under the Law, the 

new  guarantee  scheme  applies  to  all  credit  institutions  that  apply  for  membership  of  the  PCA 

before 13 October 2008, after which date such credit institutions will not be allowed to withdraw 
from the guarantee scheme during the two years for which it is scheduled to apply5. 

1.4 

In addition to the above features, the Law obliges the Minister for Economic and Business Affairs 

to set up a Winding-Up Company (WUC), fully owned by the State, with the objective of covering 

the claims of creditors of credit institutions that are members of the PCA, and of contributing to a 
regulated winding-up of failing institutions6. The WUC will have powers to organise private-sector 

takeovers  of  credit  institutions  affected  by  financial  difficulties,  either  by  means  of  a  directed 

transfer  of  the  troubled  credit  institution’s  assets  and  liabilities  to  a  purchaser  nominated  by  the 

WUC, e.g. a  subsidiary of the WUC, or of capital injections provided by the WUC to a  selected 

private-sector purchaser acquiring the assets and liabilities of the troubled credit institution under a 
commercial contract7. Where insolvency procedures are initiated in relation to a credit institution, 

the WUC will enter into an agreement with the insolvency administrator on the sale of the insolvent 
credit institution’s assets and liabilities8. 

1.5  The PCA will guarantee losses incurred by the WUC during the period of operation of the Law up 
to  a  maximum  amount  of  DKK  35  billion9.  The  State  will  guarantee  any  losses  exceeding  the 
amount guaranteed by the PCA10. 

2.  General observations 

2.1  The ECB was consulted on the Law at the draft stage in the afternoon of 9 October 2008. Less than 

24 hours later, the Danish Parliament adopted the Law. The ECB understands that the application 

4  

5  
6  
7  
8  
9  
10  

Directive  94/19/EC  of  the  European  Parliament  and  of  the  Council  of  30  May  1994  on  deposit-guarantee  schemes, 
OJ L 135,  31.5.1994,  p.  5  and  Directive  97/9/EC  of  the  European  Parliament  and  of  the  Council  of  3  March  1997  on 
investor-compensation schemes, OJ L 84, 26.3.1997, p. 22.  
See Sections 2(1) and (5) of the Law.  
See Sections 3-6 of the Law.  
See Section 7 and Section 8(1) of the Law.  
See Section 8(2) of the Law.  
See Sections 9 and 10 of the Law 
See Section 11 of the Law.  

2 

 
                                                 
of an accelerated procedure during the preparation and adoption of the Law did not leave room for 

the normal consultation process. This does not, however, prejudice the duty under Article 105(4) of 

the  Treaty  to  consult  the  ECB  on  national  draft  legislative  provisions  falling  within  its  advisory 

fields of competence, and perhaps the ECB could have been consulted on a previous draft of the 

Law a few days earlier.  

2.2  As already mentioned in a recent ECB opinion on another draft national law relating to emergency 
measures arising out of the current financial turmoil11, the ECB is of the view that it is important 

for national authorities to seek to coordinate their responses to the current financial situation with 

their EU partners. In view of the similarities of the causes and consequences of the financial crisis 

across Member States and the potential interdependencies of policy responses, it would have been 

advisable to consult other EU authorities formally on the envisaged Law at the draft stage. At the 

same time, the ECB notes that there is an ongoing discussion at international and European level 

aimed at coordinating action to preserve confidence and financial stability. More specifically, the 

ECB  would  draw  attention  to  the  conclusions  adopted  at  the  Ecofin  meeting  on  7  October 2008, 

which  highlighted  common  principles  to  guide  the  action  of  Member  States  as  follows: 

(i) interventions should be timely and the support should in principle be temporary; (ii) the interests 

of taxpayers should be protected; (iii)  existing shareholders should bear the  due consequences of 

the  intervention;  (iv)  the  government  should  be  in  a  position  to  bring  about  a  change  of 

management; (v) management should not retain undue benefits; (vi) governments may have, inter 

alia.  the  power  to  intervene  in  remuneration;  (vii)  legitimate  interest  of  competitors  must  be 

protected,  in  particular  through  the  State  aid  rules,  and  negative  spill-over  effects  should  be 
avoided12. Against this background, the ECB notes that a number of the elements contained in the 

Law  are  in  line  with  the  conclusions  of  the  Ecofin  meeting  of  7  October  2008,  inter  alia  on  the 

temporary nature of the arrangement and the possibility, subject to certain conditions, to replace the 

board and management of institutions.  

2.3 

In  line  with  the  Declaration  of  12  October  200813  made  at  the  summit  of  the  euro  area  Member 

States in Paris, the ECB notes that EU Member States have to act in a coordinated manner to avoid 

significant  differences  in  national  implementation  having  a  counter-productive  effect,  creating 

distortions in global banking markets. In particular, the ECB notes that uncoordinated decisions to 

guarantee  interbank  deposits  in  some  Member  States  should  be  avoided  as  they  may  involve  a 

fragmentation of money markets. 

2.4  At this stage, the ECB wishes to underline the importance it attaches to ensuring that the Law, and 

any  subsequent  executive  orders,  fully  comply  with  the  relevant  provisions  of  Community  law, 

including State aid rules, especially in view of the fact that interbank deposits from foreign credit 

11  

12  

13  

See  ECB  Opinion  CON/2008/44  of  3  October  2008  at  the  request  of  the  Irish  Minister  for  Finance  on  a  draft  Credit 
Institutions (Financial Support) Bill 2008. 
See 
www.consilium.europa.eu. 
See the Declaration of 12 October 2008, available on the website of the French Presidency, www.ue2008.fr. 

the  2894th  Council  meeting  (13784/08),  available  on 

the  Council’s  website, 

the  press  release  of 

3 

                                                 
institutions are covered by the guarantee scheme. This feature could be seen to give some Danish 

credit institutions a competitive advantage both in a European context and domestically, as certain 

national  competing  financial  institutions,  such  as  mortgage  credit  institutions,  are  excluded  from 
the  guarantee  scheme14.  In  this  respect,  the  ECB  notes  that  the  Danish  authorities  notified  the 

Commission  of  the  State  guarantee  on  8  October  2008.  According  to  the  Commission’s  press 

release the guarantee scheme has been approved under the State aid rules laid down in the Treaty, 

because  it  was  the  most  appropriate  means  of  addressing  the  risk  of  a  severe  disturbance  in  the 

Danish  economy,  while  keeping  potential  distortions  of  competition  to  a  minimum  through 
effective safeguard mechanisms15.  

3. 

State guarantee and the prohibition on monetary financing 

3.1  The  ECB  welcomes  the  new  guarantee  scheme,  which  is  structured  in  such  a  way  that  it  should 

encourage  the  Danish  financial  sector  to  take  an  active  and  responsible  role  in  the  measures 

necessary  to ensure  financial  stability  and  the  regulated  winding-up  of  failing institutions. At  the 

same time, it is noted that Section 3 of the Law states that the Minister for Economic and Business 

Affairs will set up a company, the WUC, with share capital provided by the State. The State will be 
the sole owner of the WUC16, which will be able to borrow to cover its financing needs17. However, 

neither  the  Law  nor  the  explanatory  memorandum  to  the  Law  specifies  or  clarifies  from  whom 

such borrowing will take place. 

3.2 

In this specific context, the ECB would remind  the Danish authorities that a number of elements 

must  be  observed  in  order  to  comply  with  the  monetary  financing  prohibition  laid  down  in  the 

Treaty.  First,  it  should  be  noted  that  the  WUC  will  qualify  as  a  ‘public  undertaking’  within  the 

meaning of Article 101(1) of the Treaty, since the State will exercise dominant influence over the 

WUC  by  controlling  its  entire  subscribed  capital  and  will  have  the  majority  vote  in  a  general 
meeting,  while  also  being  able  to  appoint  members  of  the  WUC’s  governing  body18.  The  WUC 
will  also  qualify  as  a  ‘body  governed  by  public  law’  of  Denmark  within  the  meaning  of 

Article 101(1) of the Treaty, since it will be established by the Law as a legal person financed and 

closely dependent on the Danish State, with the specific purpose of meeting needs in the general 

interest,  while  its  organisation  and  the  exercise  of  its  public  functions  and  powers  in  relation  to 
commercial banks will be based on the provisions of the Law19. The ECB notes therefore that the 

14  
15  

16  
17  
18  

19  

See paragraph 2.3 of ECB Opinion CON/2008/44. 
See  Commission  press  release  IP/08/1483  of  10  October  2008.  The  non-confidential  version  of  the  Commission’s 
decision will be made available under Case NN 58/2008. 
See Section 3 of the Law. 
See Section 3(2) of the Law. 
Such  being  the  three  options  for  classification  as  a  ‘public  undertaking’,  as  specified  in    Article  8(1)  of  Council 
Regulation No 3603/93 of 13 December 1993 specifying definitions for the application of the prohibitions referred to in 
Articles 104 and 104b(1) of the Treaty, OJ L 332, 31.12.1993, p.1. 
Cf. paragraph 2.4 of ECB Opinion CON/2008/5 of 17 January 2008 at the request of the Polish Minister for Finance on a 
draft law amending the Law on the Bank Guarantee Fund. 

4 

 
                                                 
WUC  should  not  be  allowed  to  benefit  from  any  type  of  lending  or  overdraft  facilities  from 

Danmarks  Nationalbank  to  ensure  compliance  with  the  prohibition  on  monetary  financing,  and 

Danmarks Nationalbank has confirmed that it does not intend to lend or provide any financing to 

the  WUC.  Second,  it  should  also  be  remembered  that  the  provision  of  emergency  liquidity 

assistance is a central bank function, which consists in giving support in exceptional circumstances 
and on a case-by-case basis to temporarily illiquid but solvent credit institutions20. 

3.3 

It  is  the  ECB’s  view  that  national  legislation  providing  for  the  financing  by  NCBs  of  credit 

institutions other than in connection with central banking tasks, such as monetary policy, payment 

systems or temporary liquidity support operations, in particular to support insolvent credit and/or 

other financial institutions, is incompatible with the monetary financing prohibition. 

This opinion will be published on the ECB’s website.  

Done at Frankfurt am Main, 17 October 2008. 

[signed] 

The President of the ECB 

Jean-Claude TRICHET 

20  

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 the 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, footnote 16. 

5