Objects of the company
The Financial Stability Company was established in October 2008 as part of an agreement between the Danish State and the Danish financial sector (the Private Contingency Association) on a scheme to secure financial stability in Denmark. This agreement was reached in response to the international financial crisis and the impact it was having on the financial sector.
Pursuant to the Danish Act on Financial Stability (lov om finansiel stabilitet), the object of the Company is to ensure financial stability in Denmark, including winding-up of distressed banks which decide to be wound up under the Financial Stability Company.
As at 1 October 2010, a new set of rules for winding-up of distressed banks came into force, which means that depositors and other unsecured creditors of distressed banks are no longer ensured full coverage of their claims by the Financial Stability Company under the general state guarantee scheme and that distressed banks are no longer obliged to be wound up under the Financial Stability Company. Thus, each distressed bank may choose to be wound up by the Financial Stability Company or under the general rules on termination of a financial business specified in financial legislation, i.e. according to standard bankruptcy proceedings.
In June 2011 the set of rules was expanded with a compensation scheme, letting a distressed bank being taken over by another bank without the involvement of Finansiel Stabilitet. A market based approach that is financed by the Deposit Guarantee Fund through funds or a guarantee issued to the acquiring bank. This compensation scheme is by the political agreement as of 25 august 2011 extended for the purpose of strengthening the incentive for sound banks to take over a bank in distress.
With this, Finansiel Stabilitet (model I) may provide compensation, if a sound bank is willing to take over the entire bank in distress. In addition to compensation from the Guarantee Fund for Depositors and Investors, in the future, the sound bank will also be able to obtain compensation from Finansiel Stabilitet.
Further a model is established (model II), Finansiel Stabilitet may wind up the unsound part (the red part) of a bank in distress with compensation from the Guarantee Fund for Depositors and Investors and by counting in expected losses on the individual state guarantees through winding up under Bank Package III, while a sound bank takes over the sound part (the green part) of the bank in distress and without unsecured simple creditors incurring losses.
In connection with a possible winding-up of a distressed bank under the Financial Stability Company it is ensured that depositors will not at once note any differences in the practical handling of their banking operations, i.e., depositors may still use credit cards, net bank etc. immediately after the Financial Stability Company has taken over the distressed bank.
As mentioned, an actual state guarantee no longer applies and deposits in Danish banks will thus not be guaranteed in addition to the guarantee provided by the Deposit Guarantee Fund. As at 1 October 2010, the Deposit Guarantee Fund guarantees for ordinary deposits registered in the name of a depositor with an amount corresponding to a net value of up to 100,000 euro. Thus, after 1 October 2010, depositors who have deposited larger amounts in Danish banks may suffer losses if a bank becomes a distressed bank.
The financial basis of the winding-up by Finansiel Stabilitet is based on the existing guarantee provided by the Deposit Guarantee Fund, which is combined with a compensation or a loss guarantee from the Fund for any loss suffered by the Financial Stability Company in connection with the winding-up of a distressed bank. Further with model II (see above) Finansiel Stabilitet may provide compensation to the subsidiary equivalent to the expected loss on the individual state guarantees.
In order to apply the models, it should be estimated, that the model does not set the Danish state worse off financially than if Finansiel Stabilitet was to handle the bank in distress by winding up under Bank Package III. Thus the winding-up scheme does not involve any immediate financial risk to the Danish state.
A new winding-up department has been set up under the Deposit Guarantee Fund for the purpose of the loss guarantee. The assets of the winding-up department total DKK 3.2 billion for which the financial sector guarantees.