The new Danish Credit Package Agreement (Credit Package)

Date 23 jan. 2009



On 18 January, the Danish government concluded an agreement on a credit package with all the other parties represented in the Danish Parliament except the most left-wing opposition party (Enhedslisten). The Credit Package Agreement is the second political intervention induced by the international financial crisis and the expected low economic growth in the coming years.


The Credit Package is intended to counter that businesses and citizens get caught in the credit squeeze, where they cannot obtain loans from banks and mortgage credit institutions (MCIs) for viable projects, thus creating a negative spiral.


The agreement is to be fast-tracked through the legislative process. The Minister of Economic and Business Affairs has on 21 January 2009 proposed a bill which implements the agreement. The new act is expected to be in place at the beginning of February 2009.



Political Agreement on Financial Stability (Bank Package) 

The Credit Package follows the Bank Package on financial stability, which was agreed and implemented in October 2008 to safeguard financial stability by contributing to facilitate the resumption of interbank lending. The Bank Package is intended to be a safety net, so that all claims by depositors and senior debt (unsubordinated debt) are fully covered. Thus, the Danish government, together with the Danish financial sector, has provided a two-year guarantee for all deposits with and unsecured claims against banks and savings banks with a banking license in Denmark (hereafter banks). This initiative should be seen in the context of the relatively large number of banks in Denmark.


The Danish financial sector will contribute up to DKK 35 bn. The state will provide an additional guarantee.


Further, as part of the Bank Package the government has established a company with the purpose of facilitating the winding-up of insolvent banks to ensure that the depositors and other creditors do not suffer any losses in banks.


In case a bank does not fulfil the statutory requirements of solvency, and there is no possibility of reaching a viable private solution, the winding-up company (Afviklingsselskabet til sikring af finansiel stabilitet A/S) will provide capital for a newly-established company which will take over and wind up the bank in a controlled fashion, so that all claims by depositors and senior debt (unsecured unsubordinated debt) do not suffer any losses.


Both the parties to the agreement on financial stability and the financial sector stressed that the banking industry must complement the safety net by displaying a cautious approach and by strengthening their balance sheets during the two year period. Therefore, the safety net is combined with a ban on dividend payments and share repurchases by banks as well as new stock options for bank management. Expiring stock option programmes must not be renewed or extended.


The Bank Package came in the aftermath of major losses suffered by five Danish banks, BankTrelleborg, Lokalbanken, Bonusbanken, Forstædernes Bank and Roskilde Bank, which led to them being bought or wound up.


Three of the banks, BankTrelleborg, Lokalbanken and Bonusbanken had been bought by other banks, namely Sydbank, Handelsbanken and Vestjysk Bank, respectively. Forstædernes Bank was in the process of being taken over by Nykredit Realkredit, which is a Danish MCI (the takeover has since then been completed), and Roskilde Bank was, and still is, in the process of being wound up.


Since the introduction of the Bank Package, another Danish bank has collapsed. Thus, on 28 November, EBH Bank was taken over by the winding-up company established as part of the Bank Package. 


The content of the Credit Package Agreement


The vast majority of the Danish political parties have agreed to the following:

  • Injection of tier 1 hybrid capital into banks and mortgage credit institutions
  • The guarantee scheme from the Bank Package is to be prolonged
  • Increased control of remuneration in the financial sector
  • Restrictions on the payment of dividends
  • It shall be possible for the Danish State to underwrite the issue of a private capital emission
  • Strengthening of the regulation of the financial sector and the oversight hereof

Government injection of tier 1 hybrid capital into banks and mortgage credit institutions:


Under the agreement, the Danish State will offer all solvent banks and MCIs state-funded capital injections of a total of DKK 100 bn. (Banks DKK 75 bn. and MCIs DKK 25 bn.) to the extent that all credit institutions take full advantage of the opportunity. Thus, the Danish State will offer sufficient capital to create room for banks and MCIs to continue lending money to businesses and citizens for financially sound projects. The capital injections will be financed through the issuance of debenture loans on the conditions described below.


The agreement opens up for the possibility of private investors participating along side the government.


The injections will be in the form of tier 1 hybrid capital in accordance with the revised EU regulation.


The hybrid capital may come in different forms; however, they will have the following characteristics: 

  • The capital (loans) may only be redeemed with the approval of the Danish Financial Supervisory Authority (FSA)
  • The banks and MCIs must pay interest, except in certain defined situations
  • In the case of bankruptcy, the hybrid capital shall receive dividends before the share capital but after subordinated loans and simple creditors

Thus, all credit institutions in Denmark that comply with the statutory solvency requirements may apply for state-funded capital injections until 30 June 2009.


It will be required that all participating financial institutions have a 12 per cent tier 1 capital as a minimum after the capital injection. Institutions, that prior to the capital injection had a tier 1 capital of 9 per cent or more, will, as a maximum, be offered an increase in tier 1 capital of 3 per cent, and the injection in institutions with a tier 1 capital below 9 per cent will amount to the difference between 12 and their actual tier 1 capital.


In accordance with EU-guidelines, the interest rate will vary depending on the individual bank’s rating, capital adequacy and liquidity risk. Hence, the credit institutions will be placed in three interest categories. The fixed interest rate can vary between 9 per cent and 11¼ per cent. The average interest rate is expected to be approximately 10 per cent.


The actual agreement between the Danish State and the individual bank under the Credit Package scheme will contain a provision stating that the capital is granted with the objective of creating room in the bank’s lending policies to counteract a credit squeeze. The individual bank will undertake to submit semi-annual reports on lending developments and on the bank’s lending policies. These reports will be made public.


The state-funded capital injections are intended to be temporary. Banks and MCIs may redeem the loans after a period of three years, and there will be financial incentives to do so. However, the banks and MCIs may only redeem the loans with the approval of the Danish Financial Supervisory Authority (FSA).


The guarantee scheme/safety net from the Bank Package is to be prolonged:


Banks and MCIs shall have the same opportunities as their foreign competitors of issuing medium-term loans in the period until 2013. In order to strengthen the banks’ access to private capital and, by extension, to create room for lending, a three-year transition scheme will be introduced with respect to the government guarantee in the Bank Package, ensuring a gradual phase-out of the existing government guarantee, expiring on 30 September 2010.


With effect from 1 October 2010, ordinary deposits will be covered by an increased deposit guarantee scheme of DKK 750,000.


Increased control of remuneration in the financial sector:


The Danish State will make capital available on the condition that the financial sector complies with a number of requirements regarding executive pay, including option programmes. Thus, restating and elaborating on what was agreed in the Bank Package.


Restrictions on the payment of dividends:


In accordance with the Act on Financial Stability (Bank Package), the payment of dividends is prohibited until 30 September 2010. After September 2010, institutions may pay out dividends subject to the condition that it is fully covered by the annual net profit as long as there is state capital injection.


It shall be possible for the Danish State to underwrite the issue of a private capital emission:


As an alternative to the injunction of hybrid capital, it will be possible for the institutions to apply for the Danish State to underwrite the issue of a private capital emission. Though, it is a prerequisite that the institutions can make probable that they will be able to attract sufficient private investors.


Strengthening of the regulation of the financial sector and the oversight hereof:


The regulation of the financial sector will be strengthened in the years to come to ensure a sounder funding of the financial institutions and to ensure that appropriate credit policies are being implemented. Regulation is needed at both EU and international level.


In accordance with what was agreed in relation to the Bank Package, the parties shall work together with the financial sector on permanent viable solutions.


As a consequence of the collapse of especially Roskilde Bank and Bonus Banken and as a means to restore the confidence in the financial markets, it is agreed between the parties to the Credit Package that new regulation shall prevent banks from lending money for purchasing shares in the bank or the bank’s own financial products.


The Danish (FSA) will receive an additional funding with a view to enhancing the supervision of banks and MCIs. In the future, the Danish FSA must, at least once annually, review the solvency requirements of all credit institutions, except for the smallest ones.



The expected effects of the Credit Package 

The government will propose a bill to implement the agreement. The bill will be fast-tracked through the legislative process. Thus, the new act is expected to be in place at the beginning of February 2009.


The Credit Package is not expected to have any effect on the sustainability of the Danish fiscal policy, as the capital injections are basically loans that carry interest. The parties to the agreement emphasise that the Danish State should achieve a return equal to the risk that the Danish State assumes by making the capital available.


It is the opinion of the parties to the agreement that if the credit institutions take advantage of the opportunity to receive hybrid capital of up to DKK 100 bn., even with a cautious gearing, this will lead to significant increase in the lending, which will contribute to providing access for the businesses and citizens of Denmark to obtain funding for financially sound projects that will ensure sufficient funds for operations, jobs and growth.


This memorandum is solely based on the political agreement and not the act, which is not yet adopted. Thus, changes may occur in the political process of adopting the final act.



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