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)
Date: 2009-01-26
Institutions: European Central Bank
Subjects: Denmark, State aid, credit institution, financial stability, guarantee, mortgage bank, national law, public investment

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  Central  Bank  by  national  authorities  regarding  draft 
legislative provisions1, as the draft laws relate 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 proposals 

1.1  The draft laws are motivated by the current financial market crisis and together take the form of a 

banking package to strengthen the capital base of credit 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  households,  and  at  the  same  time  to  strengthen  the 

confidence of businesses and households in the financial sector. 

1.2  The  draft  laws  will  establish  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.  

 
 
 
 
                                                 
1.3  The Law on financial stability of 10 October 2008 established a State guarantee scheme for simple 
creditors  and  depositors,  and  is  currently  limited  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 for credit institutions to beyond 30 September 2010 

combined with phasing out of the guarantees over this 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’ maturity. Under the proposal, the State guarantee will 

also  be  open  to  mortgage  credit  institutions  for  their  covered  bonds  business.  In  addition,  the 

proposal also gives the Company for winding-up distressed 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  20103,  to  be  replaced  by  the  modified  transitional  regime  laid  down  in  the 

proposal  and  by  the  regime  introduced  by  the  proposal  for  a  Law  on  State  investments  in  credit 

institutions.  

1.4  The proposal for a Law on State investments in credit institutions establishes a scheme under which 

the State will be allowed to provide credit institutions 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 remuneration 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 institutions located in Denmark, but not to foreign 

subsidiaries of Danish credit institutions. According to the terms and conditions for investments of 

hybrid core capital, ‘subsidiaries of foreign financial groups shall, as far as possible, use the capital 

provided to secure consolidation and lending in Denmark’. 

1.6  The  State  capital  injected  as  tier-1  hybrid  core  capital  into  credit  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  the  assessed  risk  connected  with  the  loan,  and  is 

estimated to be in the range of 9 to 12 % annually, and on average about 10 %. According to the 

general commentary on the draft law, it is intended 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 injection of hybrid core capital, credit institutions will have the option of 

applying for a State guarantee underwriting the raising of private capital. 

2 

3  

See paragraph 2.1 of this opinion and also ECB Opinion CON/2008/54 of 17 October 2008 at the request of the Danish 
Ministry of Economic and Business Affairs on a proposed Law on financial stability.  
See § 1(11) of the proposal. 

2 

                                                 
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  October  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  financial  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 views 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,  developments  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,  meaning  that  there  remains  a  need  to  secure  the 

medium-term raising of liquidity; (ii) credit institutions have considerable funding difficulties and 

may  be  forced  to  reduce  their  lending,  thereby  worsening  the  economic  downturn;  and  (iii)  the 

Danish  financial  stability  scheme  was  agreed  before  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  Council.  Since  then  several  Member  States  have 

adopted schemes of up to five years duration, which 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 20084 made at the summit of 

the  euro  area  Member  States  in  Paris,  the  ECB  noted  that  EU  Member  States  have  to  act  in  a 

coordinated  manner  to  avoid  significant  differences  in  national  implementation  having  a 

counterproductive  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 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  financial  stability,  and  that  the  proposal  for  an 

4  
5  

See the Declaration of 12 October 2008, available on the website of the French Presidency, www.ue2008.fr. 
See  paragraph  2.3  of  ECB  Opinion  CON/2008/54.  See  other  ECB  opinions  on  interbank  deposits  (e.g.  ECB  Opinions 
CON/2008/46  of  8  October  2008  at  the  request  of  the  Belgian  Ministry  of  Finance  on  a  preliminary  draft  law  on 
measures promoting financial stability and in particular establishing a State guarantee 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 creating a Fund for the acquisition of financial assets and a Royal Decree-Law 
adopting  urgent  financial  and  economic  measures  in  relation  to  the  concerted  European  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). 

3 

 
                                                 
extension/transitional arrangement or phasing out after 30 September 2010 under the proposal for a 

Law amending the Law on financial stability will base 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 cover 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 the 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. Furthermore, 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 credit 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  incentives  for  the  credit  institutions  to  replace  State 
capital  with  private  capital.  In  line  with  previous  ECB  opinions6,  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 limited 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 would serve to ensure the temporary nature of the 

State’s involvement and discourage financial institutions from maintaining such involvement for an 

extensive period of time. 

3.4   According  to  the  proposal  for  a  Law  amending  the  Law  on  financial  stability,  credit  institutions 
will  pay  a  fee  for  the  State  guarantee  to  be  determined  individually  for  each  credit  institution7. 

Those credit institutions which are members of the 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  

7  

See  e.g.  paragraph  3.8  of  ECB  Opinion  CON/2008/68  of  13  November  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. 
See Article 1(10) on § 16c(4) of the proposal. 

4 

                                                 
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 conditions for agreements on such investment, 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 remuneration of such investment. The commentary 

on  the  proposal  contains  some  guidelines  and  assumptions  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  measures  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  instruments  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  the  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  pricing  of 
recapitalisations9. In particular, the pricing conditions for capital support should be risk-based and 

the  ECB  has  formulated  recommendations  on 

market-oriented,  determined  by  taking  into  consideration  the  specific  risk  of  both  the  specific 

instrument  chosen  for  injecting  capital  and  the  institution  concerned.  Specific  features  of  the 

instruments  for  capital  injections  should  be  appropriately  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 capital at the time of recapitalisation of at least 

12 %. In this respect, the ECB acknowledges that this provision is compliant with the EU Council 

Conclusions of 20 January 2009 on Bank Capital which state that ‘the provision of capital to the 

banking sector is not intended to create new, higher 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  individual  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 lending to creditworthy borrowers’10. 

8  

9  

10  

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 conditions for the implementation of State capital investments and for the conversion of 
State claims into capital shares under Article 81.a of the Law on public finance. 
See  the  Recommendations  of  the  Governing  Council  of  the  European  Central  Bank  on  the  pricing  of  recapitalisations 
issued on 20 November 2008, available on the ECB’s website at www.ecb.europa.eu. 
Cf the Council conclusions on bank capital, as adopted by the Council (ECOFIN) on 20 January 2009. 

5 

                                                 
3.8   The  ECB  wishes  to  underline  the  importance  it  attaches  to  ensuring  that  the  Law  on  State 

investments in credit institutions, and any subsequent 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 expressed 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 WUC11,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 from Danmarks Nationalbank to ensure compliance 

with the prohibition on monetary financing. Danmarks 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,  which  consists  in  giving  support  in  exceptional 
circumstances and on a case-by-case basis to temporarily 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 with 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  ensure  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  
12  
13  
14  

15  

See § 3 of the Law on financial stability. 
See § 3(2) of the Law on financial stability. 
See paragraph 3.2 of ECB Opinion CON/2008/54. 
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. 
See § 2(2) of the proposal for a Law on State investment in credit institutions. 

6