Attachment - Response by the Danish government to questions in the

discussion paper on the debt write-down tool - bail-in – put forward

by the Commission

Question box 1- Point of entry into resolution

In the discussion paper the Commission raises a question on when thedebt write-down tool should be at the disposal of the authorities, if thetool is introduced in the directive.We agree that the debt write-down tool should be introduced in the com-ing directive, and support the view put forward by the Commission thatthe trigger point for the use of the debt write-down tool should be thepoint where the institution is in breach of the capital requirements includ-ing the pillar 2 capital requirements.In that regard it is very important that the trigger point is well defined,predictable and transparent so that the securities can be rated and pricedwith sufficient clarity in order to secure demand.Especially when it is a breach of the pillar 2 capital requirements thatleads to the use of the debt write-down tool, it is essential that the schemefirmly ensures that property rights are protected. In the current resolutionscheme in Denmark this is solved through voluntariness.

Question box 2 – Purpose of the debt write-down tool

The Commission suggests that the debt write-down tool could be avail-able in both an open bank and a closed bank scenario and that resolutionauthorities should be entitled to use the tool for the purpose of capitalis-ing a bridge bank (closed bank scenario) or recapitalising an institution(open bank scenario).Denmark has experiences only with the use of the debt write-down tool ina closed bank model and we have not yet taken a position on how thedebt write-down tool can be used in an open bank model.However, we welcome the introduction of a possibility to use the debtwrite-down tool in an open bank model as well.

We reserve our views on the functioning of the bail-in instrument in anopen bank model, but we would none the less recommend that a highertrigger point should be considered in order for the open bank bail-in tohave a practical use.

Question box 3 – Scope of the debt write-down tool

In the discussion paper the Commission highlights the need to be clearand precise as to which liabilities would be subject to the debt write-down power. In addition, the Commission states that a number of liabili-ties should not be subject to debt write-down. Especially secured liabili-ties and short-term liabilities with an original maturity of less than onemonth are highlighted as liabilities that could be exempted from the scopeof debt write-down tool.Covered bonds (and financial instruments concluded to hedge risks in thecover pool) are secured liabilities. The EU financial regulation is basedon the fact that covered bonds are very high quality assets allowing e.g.for larger exposures herein. As a logical consequence hereof, we find thatcovered bonds explicitly should be exempted from the scope of the debtwrite-down tool. Furthermore, such secured liabilities have, according toUCITS and to Danish law, been granted a preferential treatment in caseof bankruptcy.In addition to covered bonds the Danish resolution scheme also exemptssalaries from the debt write-down tool. Therefore, from a Danish point ofview, salaries should also be exempted from the scope of the debt write-down tool.Furthermore we do not support the suggestion put forward by the Com-mission to exempt short-term liabilities with an original maturity of lessthan one month.This is based on the view that it is extremely important that the ordinarybankruptcy order is fully respected. Furthermore, counterproductive in-centives to invest in short term liabilities that are exempted from debtwrite-down should be avoided, since this is in contradiction to the inten-tions of the coming liquidity regulation in CRR IV.

Question box 4 – Hierarchy of claims

The Commission raises a question on the hierarchy of claims and thetreatment of derivatives in connection to the use of the debt write-downtool.From a Danish point of view, we find it extremely important that in a bail-in procedure the ordinary bankruptcy order is fully respected, as men-tioned in connection to question box 4.

As a consequence hereof the Danish resolution scheme does not exemptunsecured derivatives from debt write-down and we would prefer thatthis would also be the case under the harmonised resolution regime.

Question box 5- Minimum requirements for eligible liabilities

Denmark is in favour of requiring institutions to hold a minimum amountof bail in-able debt in order to secure the sufficient loss absorbing capac-ity and to counter the adverse incentive-effects arising from a possibleexemption of certain kinds of debt. On a general level, Denmark tends tobe in favour of option 1, but cannot, however, at this point in time decideon a desirable minimum level of eligible liabilities. In our view it mustfirst be established which, if any, types of liabilities will be excludedfrom debt write down.Covered bonds are secured by assets that in terms of capital requirementsmay weigh less than 100 %. Consequently the credit institution may holdless capital to back this business activity than they have to hold for ordi-nary lending activities. The EU financial regulation in itself is based onthe fact, that covered bonds are very high quality assets allowing e.g. forlarger exposures herein. Therefore we also find that covered bonds shouldbe exempted from the scope of the debt write-down tool cf. question box3 above. As a consequence hereof covered bonds should also be ex-empted from the eligible liabilities requirements.

Question box 6 – Treatment of shareholders

The Commission raises a question on the treatment of shareholders underthe resolution regime.In this connection we would like to stress the view that the ordinary bank-ruptcy order should be fully respected. This implies that the resolutionregime should not provide for a protection of shareholders. We thereforefind that there should be an absolute obligation to cancel existing sharesunder a closed bank model.Denmark has not yet, however, taken a position on how the debt write-down tool can be used in an open bank model and what the consequencesfor existing shareholders should be.

Question box 7 – Recovery and reorganising measures to accompany

debt write-down

In the discussion paper the Commission proposes that detailed resolutionand/or reorganisation plans should be prepared for all institutions coveredby the directive. We find resolution and/or reorganisation plans extremelyimportant when it comes to systemically important financial institutions.However, it can also be a sound instrument for smaller institutions.

It is not clear from the discussion paper, whether the requirement on thepreparation of resolution and/or reorganisation plans is an ex ante re-quirement or an ex post requirement.We would like to stress that the requirement to prepare resolution planscan lead to a significant administrative burden for the institutions in ques-tion as well as for the resolution authority. This is especially the case ifthe Commission intends to introduce the measure as an ex ante require-ment.We would therefore suggest that the requirement is introduced on a pro-portionate basis allowing authorities to exempt small credit institutionsfrom the requirement.In addition, we find that the level of details in resolution and/or reorgani-sation plans should be considered, since it will be very difficult to foreseeand take into account the financial situation at the time of the resolutionor reorganisation of the institution.It is particularly important to have focus on the liquidity part of the re-covery plan, since bail-in as a resolution tool does not provide liquidityper se and merely restores the capital solution which is a basis for a pos-sible improved liquidity position. It is therefore of great importance thatcredible liquidity mitigating provisions are in place.Finally we would like to stress that we have not yet taken a position onwhen the resolution and/or reorganisation plans should be presented.

Question box 8 – Contractual recognition of debt write-down

The Commission raises a question on the treatment of eligible liabilitiesthat are governed by the law of a jurisdiction that is not a Member Stateof the European Union.We have not yet taken a position on this issue and we are therefore notable to provide an answer to the question raised.

Question box 9 – Timing for the application of the debt write-down

tool

As a final point the Commission raises the issue of introducing a grand-fathering clause in the directive.From a Danish point of view the introduction of a grandfathering clausewould limit the usefulness of introducing the debt write-down tool, sinceit would cause a risk that credit institutions would try to avoid the risk ofdebt write-down as long as possible. This could cause that large amountsof liquidity are to be refinanced simultaneously. Furthermore such a