Q&A

Crisis management involves placing credit institutions and mortgage credit institutions under regulatory control if they face severe financial difficulties and become failing or likely to fail.

A key objective is to ensure that the institution's critical societal functions are maintained while protecting taxpayers' money and covered deposits, preventing them from bearing the cost of the institution's collapse.

Crisis management is always the last resort. Initially, owners attempt to rescue the institution during a recovery phase. If that fails, private solutions, such as selling the institution, are explored. If no solution is viable, the institution becomes failing and is placed under crisis management by the resolution authority.

In Denmark and the EU, resolution authorities are tasked with preparing measures for failing financial institutions. These authorities develop crisis management strategies and assess potential barriers to implementing these plans.

Crisis management can result in maintaining the institution as a viable entity, selling parts of it, or winding it down and removing it from the market.

In Denmark, the Danish Financial Supervisory Authority (DFSA) and the Danish Financial Stability Company (FSC) jointly act as the resolution authority. During normal operations, the Financial Supervisory Authority oversees resolution planning, approving the plans drafted by the Danish Financial Stability Company, and collaborates with relevant authorities during the planning phase. Danmarks Nationalbank, the Danish central bank also contributes to the preparation of resolution plans.

When a financial institution becomes failing, the Danish Financial Stability Company takes over as the resolution authority. If private solutions are unavailable, the Danish Financial Stability Company implements resolution measures. It also manages the Deposit Guarantee Scheme (Garantiformuen) and the Resolution Fund (Afviklingsformuen).

The principle of crisis management ensures that shareholders and creditors, not the state, bear the costs of a failing institution. Financial institutions are required to maintain sufficient capital to support resolution through specific requirements, such as the Minimum Requirement for Own Funds and Eligible Liabilities (MREL) for credit institutions and a debt buffer requirement for mortgage credit institutions.

If a bank enters crisis management, its MREL contributes to ensuring that the bank has adequate liabilities to absorb losses and recapitalise the institution, protecting taxpayers from footing the bill.

If a bank or mortgage institution becomes failing or likely to fail and no private solution is feasible, the Danish Financial Stability Company assumes control and enforces resolution measures based on pre-defined strategies in the resolution plan. However, these strategies may be adjusted to the specific circumstances.

Resolution measures aim to optimise outcomes for critical societal functions and minimise risks. Tools used depend on the institution's situation and could involve sale, restructuring, or winding down.

For O-SIIs, individual resolution strategies are developed to ensure their viability post-restructuring. This may involve bail-in mechanisms, where certain liabilities are written down or converted to equity based on independent valuations. If an O-SII is part of a group, resolution actions typically target the parent company to ensure group-wide restructuring.

Credit institutions with a balance sheet under €3 billion follow a resolution strategy focused on selling viable parts quickly, with remaining activities wound down by the Danish Financial Stability Company. Losses are borne by shareholders and creditors through bail-ins. Institutions over €3 billion are assessed individually to determine the appropriate strategy.

As a customer, you can continue using your accounts, cards, and online banking during resolution, barring exceptional measures like suspension. Most activities remain unaffected and deposits up to €100,000 (approximately 750,000 DKK) are covered by the Deposit Guarantee Scheme.

Uncovered deposits may be subject to bail-in, with potential offsets for customers who hold loans at the same institution.

The Financial Supervisory Authority ensures institutions comply with financial regulations and maintain sufficient capital. Recovery plans are drafted to prevent distress and outline measures to support long-term viability. Danmarks Nationalbank, the Danish central bank, monitors financial stability and provides recommendations to address systemic issues early.

In emergencies, Danmarks Nationalbank, the Danish central bank, can provide liquidity support (Emergency Liquidity Assistance, ELA) to institutions unable to secure funding elsewhere.

The Coordination Committee for the Danish Financial Stability Company ensures cross-institution collaboration to maintain financial stability.

Following the financial crisis, the EU harmonised resolution rules under the Bank Recovery and Resolution Directive (BRRD), implemented in Danish law. Similar frameworks exist in countries like the US and UK. Authorities across borders collaborate through resolution colleges to coordinate strategies for managing distressed multinational groups.

A resolution plan is a contingency plan detailing measures to manage a distressed institution. It aims to resolve the institution without public funding, protecting depositors from financial losses. Plans are tailored to keep losses within the institution's stakeholders.

The Minimum Requirement for Own Funds and Eligible Liabilities (MREL) ensures institutions can absorb losses and that recapitalizationrecapitalisation can be used as a tool during resolution. For mortgage institutions, a debt buffer requirement applies instead of MREL.

The Resolution Fund is a collective pool financed by contributions from credit institutions, mortgage credit institutions and certain investment firms. It serves as a financial backstop in resolution scenarios, capable of injecting capital, providing guarantees, or covering losses under strict conditions.

The Deposit Guarantee Scheme protects deposits up to €100,000 per depositor and securities up to €20,000 per investor at licensed Danish institutions. Further details are available on the Deposit Guarantee Scheme website.