As a consequence of the global financial crisis, several countries implemented crisis management tools to ensure effective preparedness for handling potentially failing financial institutions in the future. In the EU, a harmonised framework was introduced through the Bank Recovery and Resolution Directives (BRRD I and BRRD II), which have been implemented in Danish law, primarily in the Act on Restructuring and Resolution of Certain Financial Enterprises (referred to as RAL) and the Financial Business Act (referred to as FIL).
The rules aim to ensure that sufficient and effective measures can be taken against credit institutions and mortgage credit institutions that are failing or likely to fail to support the continuity of their critical financial and economic functions. The overarching goal is to protect taxpayers and depositors, ensuring they do not bear the cost when an institution becomes failing, all while preserving financial stability. Institutions are expected to undergo crisis management without the use of public funds.
The regulation also designates resolution authorities in the EU and Denmark. The resolution authorities are tasked with ensuring that a plan is in place for what to do if a bank or mortgage institution needs resolution and executing the plan if necessary. In Denmark, certain institutions have been designated as systemically important financial institutions (O-SIIs), meaning their failure could have significant consequences for the entire economy if they are not properly managed by the resolution authorities.
Resolution, in this context, refers to managing institutions that are failing or likely to fail under the Act on Restructuring and Resolution of Certain Financial Enterprises. This involves enabling the institution to continue as a viable entity or selling parts of the business. For particularly smaller institutions, this can entail either selling or winding down the entire entity.
Authorities and Responsibilities
In Denmark, the Danish Financial Supervisory Authority (DFSA) and the Danish Financial Stability Company (FSC) are jointly designated as resolution authorities, with Danmarks Nationalbank acting as a consulting party for systemic institutions.
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The Danish Financial Supervisory Authority (DFSA):
- Acts as the resolution authority during normal going concern operations and in the recovery phase of crisis management until a bank or mortgage institution becomes failing or likely to fail.
- A dedicated resolution unit within the Danish Financial Supervisory Authority coordinates resolution plans and collaborates with other authorities during the planning phase.
- The Danish Financial Supervisory Authority adopts resolution plans for all credit institutions and mortgage credit institutions based on recommendations from the Danish Financial Stability Company, and consulting Danmarks Nationalbank for resolution plans regarding systemic institutions.
- Sets the Minimum Requirement for Own Funds and Eligible Liabilities (MREL-requirements) after consulting the Danish Financial Stability Company.
During the recovery phase, financial institutions may experience significant losses and face doubts about their viability. If they lack sufficient capital or liquidity to meet regulatory requirements, the Danish Financial Supervisory Authority may invoke early intervention powers alongside the institution's recovery plan to restore its financial health, as outlined in Chapter 15a of the Financial Business Act (FIL).
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The Danish Financial Stability Company (FSC):
- Becomes the resolution authority when an institution is deemed failing or likely to fail.
- Conducts a temporary valuation, appoints an independent valuer for the final valuation, and determines which resolution measures to implement.
- For O-SII institutions, resolution measures must be approved by the Minister for Industry, Business, and Financial Affairs.
- Manages the depositor guarantee scheme (Garantiformuen), covering deposits up to EUR 100,000 (approximately DKK 750,000) per depositor and oversees the Resolution Fund.
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Danmarks Nationalbank:
- Acts as a consulting party for O-SII resolution plans as part of its mandate to ensure financial stability.
Phases of Crisis Management
- Active Crisis Management:
The Danish Financial Stability Company assesses whether resolution is in the public interest and determines which resolution tools to use.
- Restructuring Phase:
After the final valuation, shares and liabilities are written down or converted, and new shareholders are approved by the Danish Financial Supervisory Authority.
- Final Phase:
The institution returns to the new shareholders, signaling the resolution’s completion and its ability to operate independently.
Crisis Management of O-SIIs
In crises involving O-SII institutions, the Coordination Committee on Financial Stability is involved in decision-making. The Coordination Committee on Financial Stability is led by the Ministry of Industry, Business, and Financial Affairs and coordinates between Danmarks Nationalbank, supervisory and resolution authorities, and other relevant ministries.
Individual Requirements and Plans
All credit institutions and mortgage credit institutions are subject to individual resolution plans. While these plans are confidential, institutions receive summaries outlining the preferred resolution strategies. For groups with multiple entities, plans are prepared at the group level, emphasising coordinated strategies to maintain operations.