Opinion of the European Central Bank of 24 May 2011 on the introduction of a compensation scheme for distressed banking institutions (CON/2011/45)
Date: 2011-05-24
Institutions: European Central Bank
Subjects: Denmark, company in difficulties, credit institution, financial stability, guarantee, liquidation, national law

EN 

ECB-PUBLIC 

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)  received  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  stability,  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  Central  Bank  by  national  authorities  regarding  draft 
legislative  provisions2,  as  the  draft  law  relates  to  the  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 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 institution, by allowing the Danish Guarantee Fund 

for Depositors and Investors (hereinafter ‘the Fund’) to provide funds or a guarantee covering all 

unsubordinated creditors of this distressed credit institution 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  

2  

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 possibility 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.ftnet.dk/en/Regler-og-praksis.aspx. 
OJ L 189, 3.7.1998, p. 42.  

 
 
 
 
                                                 
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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  October  2010  established  a  more  permanent  and 

general  regime  for  handling  distressed  banking  institutions  to  replace  the  general  Danish  State 

guarantee scheme for ordinary individual creditors and depositors which expired on 30 September 

2010. It introduced a controlled winding-up mechanism of a distressed credit institution through the 

Financial  Stability  Company  (hereinafter  the  ‘Company’)  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  transfer  its  activities  to  a  buyer  designated  by  the 

Company  or  to  enter  normal  bankruptcy  proceedings  with  the  clear  aim  of  winding  it  up  and  of 

transferring  existing  customers  to  other  institutions.  The  Company  injects  capital  into  the  new 

subsidiary  in  accordance  with  the  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  facility,  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 guarantee 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  through  guarantees  from  Danish  banking  institutions.  Where  the 

capital requirements exceed the guarantees, the Winding-Up Department can raise loans guaranteed 
by the State4.  

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  Financial  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  creditors  to  another  institution  in  connection 

with the complete transfer of the business of the 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 Guarantee Fund than the existing alternatives of winding-

3  

4  

5  

See Opinion CON/2008/54. Since the start of the financial crisis in 2007 Denmark had previously introduced three major 
laws  and  amendments  on  which  ECB  has  been  consulted.  See  Opinion  CON/2009/6,  and  Opinion  CON/2010/45.  All 
ECB opinions are published on the ECB’s website at www.ecb.europa.eu. 
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 Finance Committee, provide a guarantee for a loan made to the 
Fund to meet its commitments. 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 Finance Committee will also be provided for, if the resources of 
this department should not suffice to cover the winding-up obligations of the Fund.  
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 and the Notes on individual provisions, No 4. 

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up and insolvency proceedings under the Financial Stability 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 State aid. The financing of the new compensation 

scheme  will  be  fully  borne  by  the  banking  sector  and  has  no  budgetary  consequences  for  the 
Danish State6. As with the existing scheme, the Danish State 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 the 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 competition, and it is for the Company to execute 

such decision, which may make its execution conditional on a transparent bidding procedure open 
to all interested parties7.  

2.  General observations  

The  consultation  process  both  in  relation  to  the  ECB  and  to  Danish  authorities  and  market  participants 
was launched simultaneously with the presentation of the draft law to Parliament on 29 April 20118. 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  consulting  authority  appears  to  invoke  the  exemption 

provided  for  in  Article  3(2)  of  Decision  98/415/EC,  which  allows  for  a  reduction  below  the  minimum 

time limit for submission of the ECB’s opinion of one 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 stage’ in the legislative process. This implies that the 

consultation should take place at a stage in the legislative process that affords the ECB sufficient time to 

examine  the  draft  legislative  provisions  and  to  adopt  its  opinion  in  the  required  language  versions  at  a 

point  in  time  which  also  enables  the  relevant  national  authorities  to  take  the  ECB’s  opinion  into 

consideration before the legislative 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 banking institutions, but that the new scheme will be 

fully based on financing by the banking sector.  

6 
7  
8  

See the General Notes on the draft law.  
See the General Notes, 3.1.  
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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3.2  The ECB also welcomes that - as stated in the General Notes on the draft law - a credit institution 

for which the FSA has set a deadline to fulfil the solvency criteria must first seek a market-based 

solution.  According  to  this  approach,  a  compensation  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  efforts  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 institutions have expressed a potential 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 institution by providing funds or guarantees to cover 

all the credit institution’s unsubordinated creditors, where 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 Fund and the Fund’s Winding-up Department to 

safeguard depositor’s interests. In principle, a winding-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  
10  
11  

See Notes on individual provisions, 2. 
See Notes on individual provisions, 2, subsection (2). 
See General Notes, 8. Union law, third paragraph. 

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