Opinion of the European Central Bank of 16 April 2012 on the Deposit Guarantee Fund and the bank resolution regime (CON/2012/30)
Date: 2012-04-16
Institutions: European Central Bank
Subjects: Denmark, bank deposit, financial institution, financial stability, financing method, guarantee, liquidation, national law, public institution

EN 

ECB-PUBLIC 

OPINION OF THE EUROPEAN CENTRAL BANK 

of 16 April 2012  

on the Deposit Guarantee Fund and the bank resolution regime 

(CON/2012/30) 

Introduction and legal basis 

On  2  March  2012  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  a  guarantee  fund  for 

depositors  and  investors,  the  Law  on  financial  business,  the  Law  on  securities  trading,  the  Law  on 

financial  stability  and  the  Law  on  tax  assessment  (amending  the  funding  of  the  Guarantee  Fund  for 

depositors and investors, extending the compensation scheme, upholding banking licences as a resolution 
measure  and  the  disclosure  of  confidential  information  by  the  Financial  Supervisory  Authority)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 has the following objectives: First, it amends the method of financing of the Danish 

Guarantee  Fund  for  depositors  and  investors  (hereinafter  ‘the  DGS’).  Second,  it  strengthens  the 

possibility  of  winding  up  a  banking  institution  in  distress  without  the  non-subordinated  creditors 

incurring  a  loss,  by  amending  the  bank  resolution  powers  and  tools  available  to  the  Danish 

Financial  Supervisory  Authority  (FSA)  and  the  Financial  Stability  Company  A/S,  a  State-owned 
bridge bank3.  

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The Law on a guarantee fund for depositors and investors, see Consolidated Law No 133 of 22 February 2011 with later 
amendments; Law on financial business, see Consolidated Law No 885 of 8 August 2011 with later amendments; Law on 
securities  trading,  see  Consolidated  Law  No  883  of  9  August  2011;  Law  on  financial  stability,  see  Consolidated  Law 
No 875  of  15  September  2009  with  later  amendments  and  the  Law  on  tax  assessment,  Consolidated  Law  No  1017  of 
28 October 2011 with later amendments. 
OJ L 189, 3.7.1998, p. 42.  
The draft law implements the political agreement of 25 August 2011 (the ‘Bank Package IV’), initially adopted by the 
Financial  Committee  of  the  Danish  Parliament  on  7  September  2011  as  Document  No  181.  The  current  draft  law  is 
related to a previous draft law on the issuance of a loss guarantee in connection with an extended compensation scheme 

 
 
 
 
                                                 
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1.2  With regard to the financing of the DGS, the draft law provides for ex-ante annual contributions4 to 

be paid to the Bank Department of the DGS by the member banking institutions. The draft law also 

requires the standing liquidity facility of the DGS’s Bank Department to be maintained at 0.75% of 

the  covered  net  deposits,  in  order  to  address  situations  where  the  annual  contribution  by  the 
member banking institutions does not cover payments liable to be made by the DGS5. The standing 

liquidity facility may be used as collateral by the DGS to raise loans, including loans with a State 

guarantee.  

The draft law also extends the scope of the DGS’s Winding-up Department so that the Winding-up 

Department may cover the costs of a banking institution having to withdraw from a data-handling 

centre in connection with the merger or transfer of assets between the distressed bank and another 
bank6. 

1.3  With regard to amendments related to bank resolution powers and tools, the draft law proposes two 

changes: 

First,  the  draft  law  extends  the  existing  compensation  scheme  in  order  to  create  sufficient 

incentives  for  sound  banking  institutions  to  take  over  all  or  parts  of  a  banking  institution  in 
distress7.  The  extended  compensation  scheme  will  involve  the  Financial  Stability  Company  A/S 

which may provide compensation in connection with the winding-up or take-over of a distressed 

banking institution, in whole or in part, by a sound credit institution, i.e. the Model I and Model II 
resolution8.  Such  compensation  may  amount  to  the  level  of  losses,  which  the  State  would  incur, 

based on the state guarantees issued to the distressed banking institution under resolution.  

Second, the draft law amends the rules by which the FSA can withdraw a banking licence from a 

banking institution which no longer fulfils the statutory solvency requirements by a set date. This is 

to ensure the continued functioning of a banking institution in distress where the FSA assesses that 

there are on-going serious negotiations with one or more potential acquirers. Furthermore, the draft 

law brings forward the time at which the FSA may disclose confidential information concerning the 

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on which the ECB issued an Opinion on 9 November 2011; see Opinion CON/2011/90. All ECB Opinions are published 
on the ECB’s website at www.ecb.europa.eu. 
The draft law provides for a total annual contribution of 0.25% of the banks’ covered net deposits at 1 October of the 
preceding year. This rate may be changed under extraordinary circumstances in which the contribution may be increased. 
See §1 subsection 7 of the draft law and pages 14 to 16 of the Explanatory Memorandum to the draft law.  
See §1 subsection 7 of the draft law and page 15 of the Explanatory Memorandum. 
The Winding-Up Department was set up by Section 3 of Law No 721 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 DGS. The capital of the Winding-Up Department is provided entirely through mandatory contributions 
from the banking sector. See paragraph 1.5 of Opinion CON/2010/45.As a consequence of the extended scope in the draft 
law the Winding-Up Department will change its name to ‘the Winding-Up and Restructuring Department’.  
The  existing  compensation  scheme  allows  the  DGS,  subject  to  certain  conditions,  to  provide  funds  or  a  guarantee 
covering all depositors and non-subordinated creditors of a distressed banking institution in connection with the complete 
transfer  of  assets  and  liabilities  of  a  distressed  bank  to  another  financially  sound  bank.  The  ECB  issued  Opinion 
CON/2011/45 on this scheme on 24 May 2011. 
Under  Model  I  a  sound  banking  institution  takes  over  an  entire  business  of  the  banking  institution  in  distress.  Under 
Model  II  a  sound banking  institution purchases  the  sound part  of  the  distressed  banking  institution  from  the  Financial 
Stability  Company  A/S  and  funds  obtained  from  this  sale  are  included  in  the  winding-up  of  the  unsound  part  of  the 
distressed banking institution; this is conditional upon the industry-funded Winding-Up Department of the DGS issuing a 
guarantee  to  the  Financial  Stability  Company  A/S,  covering  any  losses  incurred  after  the  final  winding-up  of  the 
distressed banking institution. Moreover, the use of Model I or Model II resolution procedures is subject to an assessment 
by the Financial Stability Company A/S that it does not put the State in a worse financial position than if the distressed 
banking institution was to be wound up under the special bank resolution regime (the Bank Package III). 

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distressed  banking  institution  to  the  interested  private  sector  acquirers  and  to  the  public 
authorities9.  In  this  last  respect,  the  FSA  is  given  a  broader  authority  to  disclose  confidential 

information to the Financial Stability Company A/S and the committees and groups, appointed by 

the Minister for Business Affairs and Growth, which are aimed at coordinating measures ensuring 

financial stability and addressing systemic risks. 

1.4  The draft law also amends the Law on tax assessment to ensure that State compensation arising as a 

result of the application of Model I is not included in the calculation of taxable income, as is the 
case in the application of Model II10. 

2. 

General observations  

The  draft law  was submitted  to the  Danish  Parliament  on  1  February  2012;  the  ECB  only  received the 

request for an opinion on 2 March 2012. The ECB wishes to draw the consulting authority’s attention to 

the second sentence of Article 4 of Decision 98/415/EC which 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  which  affords  the  ECB  sufficient  time  to  examine  the  draft  legislative 

provisions,  and  to  adopt  its  opinion  in  the  required  language  versions  in  sufficient  time  to  enable  the 

relevant national authorities to consider the ECB’s opinion before the legislative provisions are adopted. 

3. 

Specific comments 

3.1  Ex-ante funding of the DGS 

The ECB welcomes the proposal for ex-ante funding arrangements to replace the current ex-post 

funding  arrangements  for  the  Danish  DGS.  This  solution  takes  into  consideration  the  proposed 
recast  of  the  Directive  on  deposit-guarantee  schemes  (hereinafter,  the  ‘proposed  Directive’)11 

which  anticipates  a  specified  target  level  of  ex-ante  funding  available  to  deposit-guarantee 

schemes,  based  on  a  percentage  of  deposits  held.  The  ECB  supports  ex-ante  funded  deposit-

guarantee schemes as a means to ensuring financial stability, where credit institutions participate in 

the deposit protection costs, and as an exclusive reliance on ex-post contributions may be a source 

of  procyclicality.  The  ECB  notes  that  the  proposed  Directive  may  also  introduce  risk-based 

elements into the calculation of the contributions payable into the deposit-guarantee scheme by the 

individual member credit institutions, which will better reflect the risk profiles of individual credit 
institutions thereby providing incentives to operate under less risky business models12. Further, the 

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12  

The  draft  law  proposes  that  the  FSA  may  disclose  confidential  information  at  the  point  in  time  at  which  the  FSA  has 
received  a  mandate  from  the  Ministry  of  Business  Affairs  and  Growth  to  participate  in  the  management  of  a  banking 
institution in distress.  
See §5 of the draft law. 
See the proposal by the Commission for a Directive of the European Parliament and of the Council on Deposit Guarantee 
Schemes (COM(2010) 368), as commented on in Opinion CON/2011/12. See the latest Presidency Compromise proposal 
of 14 June 2011 and the Commission’s proposal and Presidency compromise proposal of 10 February 2012 on key issues 
with  a  view  to  negotiations  with  the  European  Parliament,  both  documents  are  available  on  the  Council’s  website  at 
http://register.consilium.europa.eu. 
See  the  Commission’s  staff  working  document  ‘Summary  of  the  impact  assessment.  Accompanying  document  to  the 
proposal for a Directive of the European Parliament and of the Council on Deposit Guarantee Schemes’, p. 5, available 
on the Commission’s website at www.ec.europa.eu. 

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ECB supports the model of partial risk-based contributions, with provisions ensuring comparability 
of various asset classes13.  

3.2  Bank resolution powers and tools  

The  ECB  welcomes  the  enhancements  made  to  the  Danish  bank  resolution  regime  and  how  it 

facilitates  private  market-based  solutions  to  deal  with  banking  institutions  in  distress.  The  ECB 

understands  that  the  enhanced  resolution  procedures  to  which  the  draft  law  relates  will  be 

conducted in accordance with Union State aid rules, inter alia, as regards the involvement of the 

DGS  and  the  Financial  Stability  Company  A/S  in  these  procedures.  More  specifically,  the  ECB 

understands that the draft law establishing the extended compensation scheme has been notified to 
the Commission and that the Commission has approved the scheme in its Decision14. Finally, the 

ECB  understands  that  the  enactment  of  a  legal  framework  on  bank  recovery  and  resolution  is 

somewhat complicated due to the absence of a stable legislative proposal at Union level. It invites 

the  consulting  authority  to  review  the  law  in  light  of  the  future  Union  regulatory  framework  on 

bank  recovery  and  resolution,  in  particular  with  regard  to  the  resolution  tools  and  the  powers  of 

resolution authorities, and of the proposed Directive. 

3.3  The ECB understands that the possibility of not withdrawing a banking licence from an insolvent 

banking institution, where serious take-over negotiations are being conducted, is intended to ensure 

a smooth resolution procedure. However, this should not affect the immediate cessation of central 

bank  credit  to  any  banking  institution  that  does  not  fulfil  national  solvency  conditions  and  that 

could  result  in  the  provision  of  solvency  support.  Whereas  the  provision  of  financial  support  to 

illiquid  but  solvent  banks  constitutes  an  inherent  central  bank  task,  any  public  sector  solvency 

support of credit or other financial institutions has to be carried out by the State and not the central 

bank. Continued provision of central bank credit to such a banking institution would contravene the 
monetary financing prohibition expressed in Article 123 of the Treaty15.  

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

Done at Frankfurt am Main, 16 April 2012. 

[signed] 

The President of the ECB 

Mario DRAGHI 

13  
14  
15  

See paragraph 8 of Opinion CON/2011/12. 
See Commission Decision SA 33757 (2011/N) of 9.12.2011, available on the Commission’s website.  
See the ECB’s Convergence Report of May 2010, p. 25.  

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