09 December 2011

Commission approved extension of Danish winding-up scheme for credit institutions

The Commission has authorised two amendments to the scheme facilitating the sale of whole or part of a failing bank. The amendments entail compensation from the State either when an acquirer is ready to take over the entire failing bank or when the failing bank is being split into sound parts.

The European Commission has authorised under EU state aid rules the prolongation of Danish winding-up and compensation schemes for credit institutions until 30 June 2012. The Commission found the amended scheme to be compatible with EU rules that allow aid to remedy a serious disturbance in the economy of a Member State. In particular, the measure is limited in time and scope, ensures adequate burden-sharing and contains sufficient safeguards to minimise distortions of competition.

Denmark has amended the Act commanding the resolution mechanism for failing banks so as to allow the State to contribute to the bailing out of a failing bank. These amendments cover two options that are to apply if the resolution under the compensation scheme is not feasible. State compensation will be provided through the Financial Stability Corporation ("FSC"), which is the State-owned winding-up company, and the Guarantee Fund for Depositors and Investors ("Fund").

In the first option, one individual bank would in a competitive process take over the entirety of a failing bank. The FSC would provide the acquiring bank with compensation in form of cash or guarantees, in addition to compensation from the Fund which would be granted in line with the compensation scheme.

If the first option is not feasible, the second option introduces the possibility for a failing bank to be taken over by the FSC and split into two parts, a good bank comprising the good assets and a bad bank comprising the impaired assets. The FSC would immediately resell the good bank to a buyer, whereas the bad bank would be wound down. The FSC and the Fund would provide compensation to the bad bank to conduct the run-off without imposing a hit on creditors.

Under both amendments, the existing shareholders and subordinated debt holders of the failing bank will be wiped out. However, senior creditors will not contribute to losses in the failing bank.

The amendments introduce a hierarchy of rescue mechanisms. First, it will be assessed whether a solution for a failing bank is possible under the compensation scheme. If not, a solution under the first option and then under the second option will be assessed. Should none of the three solutions prove workable, the failing bank will be resolved under the original winding-up scheme.

The original winding-up scheme

The objective of the Danish winding-up scheme is to support value preservation in failing banks by means of a controlled winding-up on a going concern basis instead of those banks being subjected to regular bankruptcy proceedings. The scheme was initially approved on 30 September 2010 until 31 December 2010, and prolonged on 7 December 2010 until end of June 2011 and on 28 June 2011 until end of December 2011. A first amendment to the winding-up scheme, the compensation scheme, was approved on 1 August 2011 until end of December 2011. The Danish winding-up scheme is in line with the Commission's guidance on state aid to banks to overcome the financial crisis and, in particular, its Communication on restructuring aid to banks. The prolongation of the original scheme and the compensation scheme, like the approval of the two new mechanisms, is a response to the continuing financial difficulties that Denmark, like most Member States, continues to experience. Since the objective of the original winding-up scheme and the compensation scheme is to guarantee the orderly winding-up of banks, it is important to ensure the availability of the scheme as long as the financial crisis continues.

Press release

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