Danish response to the European Commission’s Consultation on the

recommendations of the High-level Expert Group on reforming the

structure of the EU banking sector

General remarks

Denmark welcomes the analysis made by the High-level Expert Groupand would like to thank the European Commission for the opportunity tocomment on its report.In our view high priority should be given to finalize the negotiations onCRD IV, Banking Union, Banking Recovery and Resolution Directive,Deposit Guarantee Scheme Directive and the revision of MiFID.

The structure and business areas of banks

The proposal of the High-level Expert Group as to mandatory legal sepa-ration of proprietary trading and other significant trading activities shouldbe further reflected upon. However, there is a need for more in depthanalysis of the possible effects, before concrete initiatives are proposed.Denmark acknowledges that a substantial amount of trading activities in-creases the risk of losses in a crisis situation. The Danish experience fromthe financial crisis shows that not only trading activities could potentiallyincrease the risk of loss. Credit risk is still considered to be the primarytrigger of losses.

The link to Banking Recovery and Resolution Directive

The second recommendation from the High-level Expert Group is to em-phasise the need for banks to draw up and maintain effective and realisticrecovery and resolution plans as proposed in the Commission’s Bank Re-covery and Resolution Directive (BRR).The High-level Expert Group finds that the resolution authority shouldrequest wider separation than considered mandatory above, if this isdeemed necessary to ensure resolvability and operational continuity ofcritical functions.

In that regard Denmark agrees that effective and credible recovery andresolution plans (RRP) may include separation and that the scope of theseparation in relation to a RRP might be wider than the proposed scopefor mandatory separation.The High-level Expert Group supports the BRR provision where the EBAis to play an important role in ensuring that RRPs and the integral resolv-ability assessments are applied uniformly across Member States and thatEBA is responsible for setting harmonized standards for the assessmentof the systemic impact of RRPs; as well as the issues to be examined inorder to assess the resolvability of a bank and the trigger elements thatwould cause a rejection of the plans.We support that EBA plays an important role in relation to the BRR ingeneral and the use of RRP specifically.Furthermore the High-level Expert Group strongly supports the use ofdesignated bail-in instruments within the scope of the BRR as it improvesthe loss-absorbency capacity of a bank. The power to write down claimsof unsecured creditors or convert debt claims to equity in a bank resolu-tion process is crucial to ensure investor involvement in covering the costof recapitalization and potential compensation of depositors. It also re-duces the implicit subsidy inherent in debt financing. This additionallyimproves the incentives of creditors to monitor the credit risk of the bank.Denmark overall strongly supports the BRR proposal and especially theintroduction of the bail-in tool in the proposal. Denmark furthermoresupports that the bail-in power is statutory and that it covers a broadscope of unsecured liabilities and that the creditor hierarchy in resolutionis as close as possible to the creditor hierarchy in insolvency procedures.The “no creditor worse off principle” should apply.The High-level Expert Group finds that banks should build up a suffi-ciently large layer of “bail-in-able” debt that should be clearly defined sothat its position within the hierarchy of debt commitments in a bank’sbalance sheet is clear and investors understand the eventual treatment incase of resolution. The High-level Expert Group finds that such debt (oran equivalent amount of equity) would increase overall loss absorptivecapacity, decrease risk-taking incentives, and improve transparency andpricing of risk.If designated bail-in instruments should be used, Denmark finds thatthese instruments should be considered a first step in a resolution plan be-fore a possible statutory bail-in tool is used.

Loan-to-Value (LTV) and Loan-to-Income (LTI)

In the Danish national legislation the LTV-requirements are higher thanrecommended by the High-level Expert Group. Since the real estate mar-

kets and regulation is very different across member states, there is a needfor some flexibility in this regard.Regarding the LTI-requirements, we find that this concept is too narrowto measure the creditworthiness of customers, for example capital man-agement, asset composition, real estate value and customer behaviour.Generally banks make an assessment of individual customers based on anumber of criteria and subject to supervision and LTI-requirementswould be a simplified approach in comparison. Therefore, Denmark doesnot agree on the LTI approach as outlined in the report.