Opinion of the European Central Bank of 9 November 2011 on a loss guarantee in connection with an extended compensation scheme (CON/2011/90)
Date: 2011-11-09
Institutions: European Central Bank
Subjects: Denmark, bank deposit, financial stability, guarantee, liquidation, national law

EN 

ECB-PUBLIC 

OPINION OF THE EUROPEAN CENTRAL BANK 

of 9 November 2011  

on a loss guarantee in connection with an extended compensation scheme 

(CON/2011/90) 

Introduction and legal basis 

On 12 October 2011, the European Central Bank (ECB) received a request from the Danish Ministry of 

Business  Affairs  and  Growth  for  an  opinion  on  a  law  amending  the  Law  on  the  Guarantee  Fund  for 

depositors and investors and the Law on tax assessment (the issuance of a loss guarantee in connection 
with the use of an extended compensation scheme)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  relates  to  the  guarantee  provided  by  the  Winding-Up  Department  of  the  Danish 
Guarantee Fund for Depositors and Investors3, which is a deposit-guarantee scheme (DGS) funded 

by the contributions by member banking institutions (hereinafter the ‘Winding-Up Department of 

the  Danish  DGS’).  This  guarantee  is  given  to  the  Financial  Stability  Company,  a  State-owned 

bridge  bank,  and  covers  potential  losses  resulting  from  resolution  procedures  for  banking 
institutions4.  The  draft  law  will  widen  the  scope  of  this  guarantee  by  allowing  the  Winding-Up 

Department  of  the  Danish  DGS  to  issue  a  guarantee  against  losses  incurred  by  the  Financial 

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The Law on the Guarantee Fund for depositors and investors, see Consolidated Law No 133 of 22 February 2011and the 
Law on tax assessment, see Consolidated Law No 1365 of 29 November 2010. 
OJ L 189, 3.7.1998, p. 42.  
The Winding-Up Department was set up by Section 3 of Law No 712 of 25 June 2010 amending the Guarantee Fund for 
Depositors and Investors of 1 October 2010, and is financially and organisationally separate from the ordinary guarantee 
obligations  of  the  Danish  DGS.  The  capital  of  the  Winding-Up  Department  is  provided  entirely  through  mandatory 
contributions  from  the  banking  sector.  See  paragraph  1.5  of  the  ECB  Opinion  CON/2010/45.  All  ECB  Opinions  are 
available on the ECB’s website at www.ecb.europa.eu. 
See Section 2(a) of the Law on the Guarantee Fund for depositors and investors. 

 
 
 
 
                                                 
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Stability Company A/S where it provides capital and liquidity support to its subsidiary taking over 

the non-performing assets of a failing banking institution in the form of ‘bad bank’ arrangement. 

1.2  The winding-up process will be conducted in accordance with the extended compensation scheme, 

Model II, which was part of the political agreement (the so-called ‘Bank Package IV’) concluded in 

August  2011  and  introduced  by  the  Financial  Committee  of  the  Danish  Parliament  in  September 
20115.  The  resolution  instruments  introduced  on  this  occasion  address  the  risk  that  small  and 

medium-sized  banking  institutions  might  encounter  liquidity  or  solvency  problems  once  their 

current  individual  guarantees  provided  by  the  State  expire  in  2012  and  2013.  More  specifically, 

Model  II  of  the  extended  compensation  scheme  establishes  a  regime  under  which  the  Financial 

Stability Company A/S, via the subsidiary company, may wind up the unsound part of a distressed 
banking institution6. Under the draft law, Model II is conditional on the Winding-Up Department of 

the Danish DGS issuing a guarantee to the Financial Stability Company A/S, which will cover any 

losses  incurred  after  the  final  winding  up  of  the  distressed  banking  institution.  This  guarantee 

ensures  that  the  financial  sector,  via  the  Winding-Up  Department  of  the  Danish  DGS,  bears  any 

loss stemming from the winding-up process and that no further burden is placed on the State by the 

expected losses related to individual State guarantees provided earlier to banking institutions. 

1.3  The draft law also amends the Law on tax assessment to ensure that the tax exemption under the 

current compensation scheme also comprises compensation disbursed to the subsidiary company of 

the Financial Stability Company A/S in connection with the winding-up of the unsound part of the 

distressed banking institution. 

2. 

General observations  

2.1  The  ECB  welcomes  the  introduction  of  a  widened  loss  guarantee  scheme  in  connection  with  the 

extended  compensation  scheme,  Model  II,  as  this  initiative  will  improve  the  possibilities  for 

handling  banking  institutions  in  distress  and  avoid  any  depositors  or  other  non-subordinated 

creditors  incurring  losses  in  connection  with  the  resolution  process.  The  ECB  supports  the 

arrangement under which the Winding-Up Department of the Danish DGS, which is providing the 

loss guarantee to the Financial Stability Company A/S, is organisationally and financially separate 

from  the  Guarantee  Fund  operated  by  the  Danish  DGS  with  the  view  to  ensuring  payouts  of  the 

guaranteed  deposits.  Such  arrangement  is  aligned  with  Directive  94/19/EC  of  the  European 
Parliament  and  of  the  Council  of  30  May  1994  on  deposit-guarantee  schemes7  which  requires 

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The  compensation  scheme  was  originally  introduced  in  April  2011  to  provide  greater  incentives  for  sound  banking 
institutions to take over distressed institutions. For a detailed description of the extension of the compensation scheme, 
see  document  No  181  of  7  September  2011  of  the  Financial  Committee  of  the  Danish  Parliament  and  the  political 
agreement of 25 August 2011.  
Under Model II, a sound banking institution purchases the sound assets of the banking institution under resolution, and 
funds obtained from this purchase are counted towards the winding-up of the banking institution under resolution. With 
the  application  of  Model  II  no  depositors  or  other  unsubordinated  creditors  incur  losses,  whereas  shareholders  and 
subordinated creditors are not covered by the compensation scheme. 
OJ L 135, 31.5.1994, p. 5. 

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deposit-guarantee  schemes  to  be  in  a  position  to  pay  duly  verified  claims  by  depositors  in  the 
periods specified by this Directive8.  

2.2  The ECB understands that the resolution process to which the draft law relates will be conducted in 

accordance with Union State aid rules in respect of the legal requirement for banking institutions to 

contribute financially to the extended functions of the Winding-Up Department of the Danish DGS 

and  in  respect  of  the  involvement  of  the  State-owned  Financial  Stability  Company  A/S  in  the 

resolution process. In addition, the ECB understands that Document No 181 of 7 September 2011 

of  the  Financial  Committee  of  the  Danish  Parliament  establishing  the  extended  compensation 

scheme has already been notified to the Commission and that a similar notification will be made in 

relation to the draft law. 

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

Done at Frankfurt am Main, 9 November 2011. 

[signed] 

The President of the ECB 

Mario DRAGHI 

8  

See Article 10(1) of the Directive 94/19/EC. 

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