General remarks

The financial crisis has shown that dealing with distressed credit institu-tions is a major challenge. Across Europe different rescue packages andresolution schemes have been put in place to ensure financial stability.The importance of an effective crisis management system is now beingaddressed by the Commission to ensure sufficient schemes in all memberstates to cope with distressed credit institutions in the future.We strongly support this initiative since a harmonised resolution ap-proach which covers all member states is required in order to ensure alevel playing field in the EU. The current situation with various ad hocsolutions across member states hampers transparency and market effi-ciency.Denmark has already established a credible resolution regime providingfor an orderly wind-up of distressed banks having dismantled a generalstate guarantee and put in place a resolution scheme in autumn 2010. Theobjective of the resolution scheme is to safeguard financial stability andto minimise economic losses when a bank becomes unable to meet thestatutory capital requirements.The new scheme allows for potential losses to senior creditors and de-positors as well as shareholders and subordinated debt while maintaininga going-concern organisation. The resolution mechanism creates incen-tives for holders of large deposits and other non-deposit creditors tomonitor banks. By reducing the risk appetite of banks the mechanismleads to a sounder financial system.The new scheme was tested for the first time during the weekend of 4-6February 2011 when Amagerbanken A/S was taken over by the Danish1

Financial Stability Company. Creditors including depositors whose netdeposits with Amagerbanken A/S are in excess of EUR 100.000 must an-ticipate immediate losses of approximately 41 per cent as the bank is liq-uidated (for further information see annex II). Customers normal bankingbusiness (e.g. use of credit cards, debtor cards etc.) were not affected. Thebank opened as usual Monday morning with no apparent difference forthe customers, who can still conduct normal banking business.Market reactions have been limited towards the functioning of the Danishresolution mechanism and how it was used on Amagerbanken A/S. How-ever, recently the long term ratings of banks incorporated in Denmarkhave been downgraded by Moody’s as they lowered their assessment ofthe likelihood of future public support and, hence, the systemic supportuplift they had applied previously. This rating action was initiated afterthe Danish resolution regime was used for the first time on Amager-banken A/S.As a consequence we see the creation of more uniform resolutionschemes across the EU as crucial in ensuring an effective single market inbanking. The Danish scheme - which is broadly in line with the principlesin the Commissions consultation document - shows that it is possible totake rapid and decisive action in order to wind-up failing banks and avoidcontagion to the general banking system.

Central issues

Five general points on central issues are raised in the following. Pleasefind our detailed comments to specific sections in annex I.ScopeAs for the scope of the resolution regime we agree that the regime shouldcover all credit institutions. However, there should be a measure of pro-portionality in relation to smaller financial institutions with no cross bor-der activities in order to avoid excessive administrative burdens. Fur-thermore, we support the work by the Commission in considering whichcrisis management arrangements might be necessary for other types offinancial institution.Furthermore, it should be pointed out that the Danish legislative frame-work offers an alternative to ordinary liquidation. For the system not tobe expropriatory and conflict with fundamental principles it is voluntaryfor the credit institution which can always choose a normal insolvencyprocedure. We believe that the same approach should be taken at EUlevel.Asset transfersWe support further work on a European framework on asset transfers tosupport financial stability and to prevent and mitigate financial crisis2

situations while at the same time assuring legal certainty and minimizingcontagion risk between companies in a group.However, transfer of assets intra-group can contain a risk of contagion(abuse of a dominant position). Our statutory practice to prevent conta-gion requires a prior permission from the supervisor to the financial insti-tution before transfer of assets (exposures) upwards and side wards in agroup is allowed. Recent experiences have illustrated the usefulness of aregime requiring prior supervisory approval of intra-group exposures inavoiding contagion. Avoiding contagion is in our opinion as important asfacilitating intra-group financial support. This is especially the case aslong as there is no effective cross border crisis resolution framework inthe EU and no agreement on possible burden sharing among memberstates in crisis situations. Until an effective cross border recovery andresolution framework is in place it is very important for us to be able tomaintain these tools.Debt write downA transparent and credible possibility of debt write down will be neces-sary to ensure that creditors of especially large credit institutions will do athorough analysis of the credit risk before lending to a credit institution.The financial crisis showed that the possibility of losses for shareholderswas not sufficient to discipline the behaviour of credit institutions. There-fore broader measures are needed such as the possibility of debt writedown. In addition it is also necessary to ensure resolution of a credit insti-tution without government intervention. With a debt write down thecredit institution can continue its business to the benefit of the economy.The comprehensive approach is preferred since it is at least as attractiveas the alternative (i.e. liquidation) to creditors. This is important becauseotherwise there will be creditors who would have been better off in a liq-uidation process and consequently hold the management or the resolutionauthority responsible for their loss. Furthermore, this approach works inall circumstances since - contrary to the targeted approach - there is noupper limit to the write down.It should be noted that if a debt write down applies to shares or existingdebt issued before entry into force of the power such write down could beexpropriatory and a compensation mechanism would be necessary.Finally, we find that there must be no doubt that holders of covered bondsand junior covered bonds always will receive timely payment. Holders ofcovered bonds shall according to CRD and UCITS benefit from a privi-leged status in case of bankruptcy and holders of junior covered bonds doalso benefit from such a status. It should therefore be made clear thatcovered bonds and junior covered bonds should not be subject to debtwrite down.3

FinancingWe strongly support that member states should be able to meet financingrequirements for the resolution regimes through the existing structure ofthe deposit guarantee schemes in order to exploit synergies. The compati-bility of such an approach with staid aid rules should be made clear.As for the target size and the phasing in of the fund it is necessary to takeinto account the various other regulatory initiatives under way, e.g. capi-tal and liquidity requirements, as well as the revision of the directive ondeposit guarantee schemes. Too strict financing requirements in the newresolution regime may risk affecting the real economy in member states.Furthermore, an appropriate balance between ex ante and ex post financ-ing is necessary.Derogations from basic legal principlesDerogations from national basic legal principles cause uncertainty andreduce transparency. Derogations should therefore be avoided or limitedto the largest extend possible. This applies to company law, bankruptcylaw and general principles of liability and judicial recourse. Especiallyderogations from national bankruptcy law may cause uncertainty and lackof transparency which can have a negative impact on the credit institu-tion’s funding possibilities. This is not in the interest of financial stabilityand such derogations should therefore be considered very carefully.

Annex I: Detailed comments

Scope of preparatory and preventive measures and resolution tools

(Part 1)

As for the scope of the resolution regime we agree that the regime shouldcover all credit institutions. However, there should be a measure of pro-portionality in relation to smaller financial institutions with no cross bor-der activities in order to avoid excessive administrative burdens. Fur-thermore, we support the work by the Commission in considering whichcrisis management arrangements might be necessary for other types offinancial institution.

Authorities responsible for resolution (Part 1 – question box 3)

We support that the designation of the administrative authority to applythe resolution tools and exercise the resolution powers should be left tonational discretion. Some member states already have different kinds offrameworks and it should be possible to build upon these.As long as the credit institution fulfils the capital requirements we findthat the main responsibility should stay with the supervisor. This impliesthat some of the responsibility for the resolution plan rests within the su-pervisor and not with the resolution authority.Furthermore, it should be considered if it is possible to create a clearerdistinction between “living credit institutions” and "near death credit in-stitutions", where the supervisor has set a deadline for the fulfilment ofthe capital requirement. As long as the credit institution is a “living creditinstitution” the responsibility for the institution rests with the supervisors.The resolution authority needs to get involved if the credit institution is a“near death credit institution”.That is also the approach in the Danish framework where the FinancialStability Company takes over the “near death credit institution” meaningan institution which no longer fulfils the capital requirements and wherethe supervisor may revoke the license.

Supervision (Part 2.A. – question box 4)

In general we welcome a reinforcement of the supervisory regime withregard to supervisory planning and forward looking risk assessment.Stress testing is a key management tool in financial institutions andshould be well-integrated. It is also a very useful supervisory tool amongothers. We believe stress tests should be conducted both by supervisorsand by all financial institutions on a frequent basis. Stress testing by su-pervisors allows for a cross-sectoral view of the resilience in financialinstitutions and is a backbone in the supervisory review evaluation proc-ess and dialogue. Institutions must observe and incorporate stress test re-5

quirements in a proportionate manner to reflect the nature, scale andcomplexity of the activities.We welcome further convergence at EU level on the general principles ofnational stress testing exercises. However, it is important to leave a roomfor national discretion as regards the sample, scope and relevant macro-economic scenarios. We see merits in closer cooperation on stress testingwithin supervisory colleges.We acknowledge that occasional disclosure of stress test results in rela-tion to individual financial institutions can be a possibility under extraor-dinary circumstances as disclosure might contribute to restore confidencein financial markets. Proper back stops mechanisms, i.e. effective resolu-tion frameworks, must be in place and communicated to the market ifstress test results are disclosed.

Recovery planning (Part 2.B. – question box 7)

It is proposed that credit institutions should develop and maintain recov-ery plans detailing how an institution and its activities might be disman-tled and wound up rapidly and in an orderly manner.We agree that recovery plans could be developed subject to proportional-ity principles and a careful assessment of the costs and benefits. It shouldbe noted that the recovery plan may not be exhaustive in a crisis situation.Furthermore we find that the need for group recovery plans should be fur-ther assessed. The entity specific recovery plan might be sufficient tomake an assessment of the group recovery plan.We support that the management of the financial institution shall take allnecessary steps to avoid financial difficulties. There must be no doubtthat this is the responsibility of the management. The management mustmake its decision after collecting all necessary updated and available in-formation. However, it shall not be sufficient automatically to fall backon previously adopted policies and recovery plans even if these may beincluded in the box of instruments that the management will look to incase of financial difficulties or crises.Generally lack of responsibility increases the risk of moral hazard. There-fore the management of the institution should not by regulation be re-leased from its responsibility and certainly not on the grounds that themanagement simply has followed the previously adopted policies andplans.

Intra-group financial support (Part 2.C. – question box 9-17)

We support further work on a European framework on asset transfers tosupport financial stability and to prevent and mitigate financial crisissituations while at the same time assuring legal certainty and minimizingcontagion risk between companies in a group. There is a need to look into6

best practices on how to regulate intra-group exposures and transactions.In some situations transfer of assets should be limited and in other situa-tions transfer of assets should be encouraged.Distinct and clear liabilities on each financial institution in a group willcontribute to transparency. Introducing intra-group liability may have ad-vantages in some situations but will cause uncertainty and reduce trans-parency in other situations. This applies both to groups that operate na-tionally and across borders.Transfer of assets intra-group always contains a risk of contagion (abuseof a dominant position). Our statutory practice to prevent contagion re-quires a prior permission from the supervisor to the financial institutionbefore transfer of assets (exposures) upwards and side wards in a group isallowed. Generally intra-group exposures will be accepted by the super-visor up to a limit of 25 per cent of the capital requirement plus theamount of surplus capital of the lender. The supervisor may raise or lowerthis limit based on an individual evaluation of the risk. In addition allintra-group transactions (including exposures) must be based on marketterms.Recent experiences (also during the financial crisis) have in our opinionillustrated the usefulness of a regime requiring prior supervisory approvalof intra-group exposures in avoiding contagion. Avoiding contagion is inour opinion at least as important as facilitating intra-group financial sup-port. Therefore, it is very important for us to be able to maintain thesenational requirements and we suggest that a future EU framework forbank recovery and resolution should be inspired by this regime.On a specific note we find it necessary and crucial that the entity specificauthority has the power to refuse transfer of assets to other entities in thegroup. The decision from the entity specific authority must be based ongood and justified grounds. It will be in contradiction with general legalprinciples (legal entities are responsible for own debt) in Denmark to in-troduce the concept of group interest and we are not convinced that theadvantages hereof will exceed the disadvantages.Furthermore, as mentioned in the general comments derogations fromnational bankruptcy law may cause uncertainty and lack of transparencywhich can have a negative impact on the funding possibilities of creditinstitutions. Such uncertainty thus risks undermining financial stability.As for the decision to engage in a transfer of assets there must be nodoubt that the management body of each institution is responsible for itsdecisions. Public authorities may require the end to a certain behaviour oractivity as well as impose requirements that must be met by the institu-tion. According to CRD higher capital requirements can be imposed bythe supervisory authority on the financial institution. However, it should7

be the responsibility of the management body to decide how to meet thedemands and requirements from the authorities.If demands or requirements are not met the relevant authority may use theinstruments they are given by the law including replacing the manage-ment and revoking the license of the financial institution. However, itseems to be in contradiction with legal principles if a public authority isauthorized to assume management power over an institution includingordering transfer of assets between two separate legal entities.We agree that it will be useful to require the financial institutions to adoptpolitics or plans that may be used in case of financial difficulties or im-minent crises. But it will be almost impossible in advance to foreseewhich actions by the management will be appropriate in case of financialcrises or difficulties in a group. Therefore, we do not find that the resolu-tion plan or financial support agreement should be legally binding on theinstitutions.If it nevertheless is decided that the resolution plan or financial supportagreement should be legally binding on the institution it is necessary toconsider that a group financial support agreement should be approved bythe shareholders’ meeting. However, it is unclear which quorum or ma-jority would be required in order for the agreement to be approved. Thisquestion is rather critical if there are minority shareholders in any of therelevant companies as the financial support could potentially, it seems,favour the majority shareholder (the parent company) at the expense ofany minority shareholders and such a decision could therefore dependingon the circumstances require a unanimous decision at the shareholders’meeting according to the current rules in some Member States, includingin Denmark.It is therefore relevant to consider whether national legislation on quorumand, in particular, majority requirements should apply when the manage-ment proposes to the shareholders to enter into agreements on intra groupfinancial support or whether a harmonised set of EU rules should apply. Itcould be relevant to map the rules in the different Member States to getan overview on the current situation in this respect.

Resolution Planning (Part 2.D. – question box 21)

The Commission proposes that the resolution authorities - in consultationwith supervisors - should be required to draw up and maintain resolutionplans for each credit institution for which they are resolution authority.Credit institutions should supply information necessary for the drawingup and maintenance of resolution plans on the request of the resolutionauthority. We would welcome further clarification on how the institutionsare involved in the development of the resolution plan.

As mentioned above we find it should be considered if it is possible tocreate a clear distinction between “living credit institutions” and "neardeath credit institutions" where the supervisor has set a deadline for thefulfilment of the capital requirement.Furthermore, the concept of group level resolution authorities and theneed for group resolution plans must be further assessed. The most rele-vant plan must be the plan for the bank itself. That is where all the activi-ties are (the assets, liabilities, the depositors etc.).Finally, we are concerned about the distribution of responsibilities be-tween resolution authorities and supervisory authorities. We find that theproposed preventative powers intervene with the normal functioning ofthe supervisory process. Such powers should exclusively be applied bythe supervisory authority. A way to solve this issue would be that resolu-tion authorities would propose to supervisory authorities the impositionof a list of measures to remove the impediments to an effective resolu-tion.

Early Intervention (Part 3.E. – question box 24-27)

We are generally supportive of extending the circumstances in which thesupervisory powers of early intervention may be exercised. We find thetriggers sufficiently flexible.We do not see the necessity of appointing a special manager. We find thatthe tools where the supervisor can require the credit institution to replaceone or more board members or managing directors or require their dis-missal strike an appropriate balance in this respect. Furthermore, it shouldbe considered that such a tool would be a derogation from the normalcompany law framework (outside the insolvency/-resolution phase)where such issues are left to shareholders and management to decide. Itshould be noted that such a measure could be considered expropriation ofshareholders’ rights and thus could activate special constitutional rights inMember States.We find that the consolidating supervisor should be responsible for as-sessment of group level recovery plans and where necessary an agree-ment on group level should be reached within the supervisory colleges.Supervisors should strive for a joint decision on the implementation of agroup recovery plan. In case of disagreement supervisors should be ableto refer the matter to the EBA but the EBA decision should not be bind-ing on the supervisors involved. The suggested timeline (24 hours) fordecisions by the consolidating supervisor and the mediation authorityseems too short.

Resolution: Conditions, objectives ad general principles (Part 4.F. –

question box 28)

The Commission proposes that the resolution authorities should apply theresolution tools and exercise the resolution powers when a credit institu-tion is failing or likely to fail and the conditions for resolution are met.Again we would refer to the need for a clear distinction between “livingcredit institutions” and "near death credit institutions". The triggers forresolution should follow this distinction.Specifically, we support option 3 which seems to be the most appropriatetrigger as it is a purely quantitative capital trigger. However, we find thatthe trigger needs to be adjusted to specify that the trigger point is wherethe bank no longer possesses sufficient tier 1 instruments as required un-der chapter 2 of title V of the CRD to meet the requirement of Article 75of the CRD.We believe the trigger condition of "likely to fail" can create too muchuncertainty. We suggest therefore that the approach should be that thecredit institution notifies the supervisor that it is failing or likely to fail.This notification means the supervisor sets a deadline to the credit institu-tion to fulfil the requirements. If this requirement has not been met by thecredit institution the supervisor shall revoke the institution’s license andthe credit institution must be resolved under the responsibility of the reso-lution authority.We find that the general principles governing resolution seem appropri-ate. We attach importance to the principle that creditors of the same classare treated in a fair and equitable manner and that no creditor incursgreater losses than would be incurred under liquidation. Furthermore, wefind it necessary to require independent valuation in the resolution proc-ess.

Resolution tools and powers (Part 4.G. – question box 31)

We find that the resolution framework should cover a broad range oftools in order to enable member states to address a specific crisis mosteffectively. We find the proposed resolution tools sufficiently compre-hensive to allow resolution authorities to deal with a credit institutionwhich needs to be resolved.However, we would welcome further guidelines regarding when the useof these tools is considered as being in compliance with the Treaty andstate aid rules.In order to ensure a level playing field and to facilitate smooth coopera-tion between authorities we agree that resolution tools should as far aspossible be harmonized at EU level. However, this should not prevent10

member states from supplementing the EU resolution framework withnational tools and powers.We find that the power to take control over the affected credit institutionmust be considered carefully and it must be considered in connectionwith the assessment of the scope of this framework and the distinctionbetween supervisors and resolution authorities.It should also be pointed out that the Danish legislative framework offersan alternative to ordinary liquidation. For the system not to be expropria-tory and conflict with fundamental principles it is voluntary for the creditinstitution which can always choose a normal insolvency procedure. Webelieve that the same approach should be taken at EU level.Finally, we find that there must be no doubt that holders of covered bondsand junior covered bonds always will receive timely payment. Applyingresolution tools must not jeopardize this objective. Assets which serve ascollateral for holders of covered bonds and junior covered bonds shouldtherefore not be affected by resolution or recovery. We suggest that thisspecial treatment of covered bonds is explicitly taken into account in partG and when designing the appropriate resolution tools.

Partial transfers: Safeguards and compensation (Part 4.H. – question

box 46-51)

The Commission approach is based on the presumption that the enforce-ment of close-out netting or security rights may be stayed if a decision ofa resolution is taken.Should this be the case we find it important that all or none of the transac-tions/securities comprised by a netting agreement and/or financial collat-eral agreement should be included in the stay and that safeguards are ap-plied accordingly. A solution where transactions entered into or securitiesprovided under the same agreement are split in case of a resolution maylead to unexpected losses for banks who in their daily risk managementprocedures will not be able to foresee exactly how a possible resolutionrelated to an unknown counterparty may impact its counterparty risk.We also find that it should be considered if the proposed safeguardsshould lead to amendments of or supplements to the Financial CollateralDirective. Financial Collateral Agreements including netting agreementsare regulated by that directive while this is not the case for set off andstructured finance arrangements.We agree that the protection against cherry picking if a resolution iscommenced may affect the flexibility of the resolution authority. How-ever, we find that the safeguard of legally sound agreements on whichmarket participants base their risk management should be protected.11

We also find that express provisions for the protection of trading, clearingand settlement systems should be made. The provisions of the SettlementFinality Directive should suffice provided that the priority between theSettlement Finality Directive and the crisis management framework isclearly defined. If amendments or supplements to the Settlement FinalityDirective are required or are desirable may depend on the final wordingof the crisis management legislation.

Group Resolution (Part 5 – question box 52-53))

We agree that there is an urgent need to strengthen cross-border coopera-tion during emergency situations and to prevent fragmented national re-sponses.In order to ensure effective coordination and take advantage of existingstructures we believe that the ‘institutionalisation’ of cross-border resolu-tion groups as suggested by the Commission should be implementedthrough the existing cross-border stability groups. A possibility would beto form a resolution college as a subgroup to the cross-border stabilitygroups. In this context the Nordic-Baltic Cross-Border Stability Group(NBSG) has been established in mid 2010 to implement the Nordic andBaltic agreement on financial stability.A challenge in implementing effective resolution colleges will be to en-sure that responsibilities for group resolution are not dissipated in acommittee structure that will remain relatively complicated and frag-mented. We welcome that the group level resolution authority can decideon the composition of the resolution college.We find that resolution colleges can prepare the emergency situation andtake into account the responsibilities of national authorities and strive fora voluntary joint decision as to the activation of an agreed group resolu-tion plan. A common toolbox of resolution tools can facilitate group reso-lution.We find that the framework strikes an appropriate balance between thecoordination of necessary actions to deal with a group in an imminentcrisis and the need for authorities to react quickly if the situation requiresit.

Financing arrangements (Part 6 – question box 57-61)

We strongly support that member states should be able to meet financingrequirements for the resolution regimes through the existing structure ofthe deposit guarantee schemes in order to exploit synergies. The compati-bility of such an approach with staid aid rules should be made clear.As for the target size and the phasing in of the fund it is necessary to takeinto account the various other regulatory initiatives under way, e.g. capi-tal and liquidity requirements, as well as the revision of the directive on12

deposit guarantee schemes. Too strict financing requirements in the newresolution regime may risk destabilising the financial systems in memberstates. An appropriate balance between ex ante and ex post financing istherefore necessary.

Design of debt write down as a resolution tool (Annex I – question

box 62-66)

We fully support the introduction of a resolution tool as proposed by theCommission with a possibility to write off all equity and either write offsubordinated debt or convert it into an equity claim. Such approachwould be in line with the principles underlying the current Danish resolu-tion framework.To provide sufficient flexibility in the resolution phase the Commissionconsiders two possible models for additional write down powers.A comprehensive approach where the authorities are given a statutorypower to write down by a discretionary amount or convert to an equityclaim all senior debt. The comprehensive approach aims to make a broadrange of senior creditors face the real risks associated with failure ofcredit institutions. It would be exercisable in principle in relation to allsenior debt.Furthermore, a targeted approach where the authorities require credit in-stitutions to issue a fixed volume of 'bail-in able' debt which could bewritten down or converted into equity based on a statutory trigger.A transparent and credible possibility of debt write down will be neces-sary to ensure that creditors of especially large credit institutions will do athorough analysis of credit risk before lending to a credit institution. Inaddition it is also necessary to ensure resolution of a credit institutionwithout government intervention. With a debt write down the credit insti-tution can continue its business to the benefit of the economy.The comprehensive approach is preferred since it is at least as attractiveas the alternative (i.e. liquidation) to creditors. This is important becauseotherwise there will be creditors who would have been better off in a liq-uidation process and consequently could hold the management or theresolution authority responsible for their loss. Furthermore, this approachworks in all circumstances since - contrary to the targeted approach -there is no upper limit to the write down.It should be ensured that all creditors of the same ranking (in respect ofthe situation in liquidation) should receive the same write down. Shares,hybrids and subordinated debt should be written down first. All classes ofother debt should be written down with the same percentage. Also de-positors should be faced with write downs. The deposit guarantee schemewill, however, cover most of the losses.13

It should be noted that if a debt write down applies to shares or existingdebt issued before entry into force of the power such write down could beexpropriatory and a compensation mechanism would be necessary.The write down should be calculated based on the debt net of eventualloans etc. i.e. a depositor with deposits of EUR 1 million and a loan ofEUR 1 million should be set-off and should not face any write down.The condition for entering into a debt write down could be that the super-visor finds that a bank no longer possesses sufficient total capital instru-ments as required under the CRD. However, in practice it is also a neces-sary condition that the credit institution:- has incurred losses that will deplete its equity, or- is or is likely to be unable to pay its obligations in the normal course ofbusiness.The write down must as a consequence be followed by a takeover and arecapitalization by the resolution authority for the institution again to ful-fill the capital requirement.The amount of write down will have to be determined or evaluated byauthorized public accountants.However, there are also merits in the targeted approach. The write downfeature will only affect an investor group which already knows this riskand minimizes the risk of the holders of “truly” senior tranches. Based onthe Danish experience the need for write down can, however, turn out tobe significant. In a present case the write down was 40 percent. However,if around 30 per cent of the total liabilities are with a write down featureit would help to ensure that most institutions are resolvable. It is, how-ever, not clear that it would be possible in practice to issue such largeamounts.A further advantage of the targeted approach is that it does not containthe same problems in relation to expropriation and rights of shareholdersand creditors as the comprehensive approach since the write down ismade on a contractual basis.As we understand it, the targeted approach can be used in both going andgone concern. If used in a going concern, i.e. debt is converted to equityin order to avoid bankruptcy, debt holders will probably expect share-holders to bear losses as well. Furthermore, if the issuance of “bail-inable” debt is required by the authorities there is a question as to the mar-ket demand for such debt and what to do if the bank cannot sell theamount of “bail-in able” debt required by the authorities.

As mentioned earlier we find that there must be no doubt that holders ofcovered bonds and junior covered bonds always will receive timely pay-ment. Holders of covered bonds shall according to CRD and UCITS ben-efit from a privileged status in case of bankruptcy and holders of juniorcovered bonds do also benefit from such a status. It should therefore bemade clear that covered bonds and junior covered bonds should not besubject to debt write down.

Company Law (Annex II – question box 69-70)

Firstly it should be mentioned that the existing Danish resolution systemcoexists with and does not require derogations from national companylaw.Evidence from the recent financial crisis seems to suggest that there couldbe a need for creating a mechanism for a rapid increase of capital.Option 2 (a general meeting mandate to the management body) wouldprovide the possibility for a more rapid increase of capital whereas Op-tion 1 (shortened convocation period) would leave the shareholders morein control of the capital increase. We find that depending on the state ofthe emergency speediness or shareholder control could be the priority.According to the working document Option 2 presupposes a derogationfrom the 2nd Company Law Directive. In that context it should be notedthat Article 25(2) of that directive already provides for the possibility of amandate which, however, must not be longer than maximum 5 years.It is unclear what would be the situation in case the general meeting doesnot provide for either of the two options. Presumably the normal frame-work would apply with the risk that the capital increase can not be de-cided on in time to prevent the financial institution from entering theresolution phase.

Annex II: The Danish winding-up framework

In the autumn of 2010 Denmark established a national crisis resolutionmechanism to deal with distressed banks. The objective of the Danishresolution mechanism is to safeguard financial stability and to minimizeeconomic losses when a bank becomes unable to meet the statutory capi-tal requirements. The framework offers the banks an alternative to ordi-nary liquidation if it is not possible to find a private solution. A distressedbank can decide on a voluntary basis to be wound up under the resolutionmechanism.The steps in the resolution mechanism are the following:-When a bank no longer meets the statutory solvency requirement theDanish Financial Supervisory Authority sets a date at which the bankagain has to comply with the solvency requirement. This is the triggerfor the framework.Within six hours after the receipt of the injunction the bank has to no-tify the Danish Financial Supervisory Authority whether it wants tobe resolved by the Danish Financial Stability Company A/S (in case itfails to meet the solvency requirements in time).Within the timeframe set by the Danish Financial Supervisory Au-thority the bank can make private arrangements to stabilize the bankor the bank can enter into a transfer agreement with the Danish Fi-nancial Stability Company A/S.According to statutory requirements banks shall at all times be able towithin 24 hours to produce necessary statements and informationabout deposit and loan accounts, pension custody accounts etc. of thebank so that Danish Financial Stability Company A/S can make a pre-liminary valuation of the assets and liabilities.Procedures have been set in place between relevant national authori-ties making it possible for a transfer to be effected during a weekend(establishing a new bank, provide the new bank with sufficient capi-tal, and, if necessary, liquidity, transfer the assets etc.).

resenting around 1 per cent of the total amount of loans granted by Dan-ish banks - notified on 4 February 2011 the Danish Financial SupervisoryAuthority that it no longer met the solvency requirement under the Dan-ish Financial Business Act. The bank was given until 6 February 2011 (7p.m.) to fulfil the solvency requirement set by the Danish Financial Su-pervisory Authority. During the weekend the bank entered into a transferagreement with the Danish Financial Stability Company (Finansiel Sta-bilitet A/S) and effective of 6 February 2011 Amagerbanken A/S trans-ferred all of its assets to a newly formed subsidiary bank under FinansielStabilitet A/S. Customers normal banking business (e.g. use of creditcards, debtor cards etc.) were not affected during the weekend. The bankopened as usual Monday morning with no apparent difference for the cus-tomers, who can still conduct normal banking business.Payment for the transferred assets has been set at a preliminary DKK 15.2billion, corresponding to approximately 59 per cent of the bank's unse-cured senior liabilities. Payment has been effected by the new bank tak-ing over liabilities in the same amount. Creditors including depositorswhose net deposits with Amagerbanken A/S are in excess of EUR100.000 (approx. DKK 750.000) must anticipate immediate losses of ap-proximately 41 per cent as the bank is liquidated.The final amount to be paid will be determined within three months fromnow by assessors appointed by the Institute of State Authorized PublicAccountants in Denmark. If the final amount exceeds the preliminaryamount the new bank will take over additional liabilities. There are cur-rently known liabilities of DKK 13.2 billion which will not be taken over- of these DKK 2.6 billion are subordinate liabilities and DKK 5.6 billionare liabilities individually guaranteed by the State.The new bank will receive capital and liquidity from Finansiel StabilitetA/S so that it will fulfil the capital and liquidity requirements under theFinancial Business Act. If the closing of the bank yields proceeds exceed-ing Finansiel Stabilitet A/S' contribution plus interest accrued at a mar-ket-based rate of return requirement, the proceeds will be applied to coverliabilities not transferred to the new bank in which case the losses ofcreditors will be reduced.The Commission has been informed about the transfer of all Amager-banken A/S' assets to the newly formed subsidiary bank under FinansielStabilitet A/S and the transfer will be notified to the Commission in thenear future.

Commission consultation on technical details of a possible EU

framework for bank recovery and resolution