Bank Account Holders in Denmark: Protect Your Account Balance and Qualify for Deposit Insurance Repayment When Banks Fail or Stop
As an EU member state and participant in the European Economic Area, Denmark opted out of the monetary union. It maintains its own independent currency, the Danish Krone. The country has a small and open economy with a liberal trade policy and a healthy fiscal policy. Foreign trade and the service sector dominate the economy. A high tax rate applies to both individuals and corporations, while the Nordic model integrates free market capitalism with a strong welfare state and labor protections. Mandatory pension schemes and a strong and comprehensive social safety-net contribute to low unemployment. This results in a high purchasing power parity for Danish people.
Foreign direct investment, international trade and large capital inflows enable global investors to utilize the Danish infrastructure. The account surplus is stable making the country into a net creditor, allowing for high personal savings, while the international investment position of the country is the highest net foreign wealth relative to GDP in the EU. To stabilize and maintain this position, Denmark provides interesting incentives such as a special time-limited tax regime for expatriates.
The Danish Economy and Financial System
The Danish high income economy provides its citizens with ample opportunities to create and maintain wealth. Over 95% of the labor force is employed or runs its own business. The financial sector and regulatory framework is tailored towards their needs. Danmarks Nationalbank, the central bank of the country, is responsible for the maintenance of the international exchange rate of the Danish Krone. Since the bank is required to maintain a stable exchange rate, it cannot simultaneously conduct monetary policy to stabilize inflation or unemployment. Inflation is generally low due to the balanced budget and fiscal position. However, uncommon price increases are then difficult to manage.
Credit is primarily provided to Danish individuals and corporates by banks and mortgage banks. In terms of GDP, the banking and mortgage banking sector is among the largest in Europe. These financial institutions play an important role in society by facilitation a payment system and the conversion of short term deposits into long term loans. Mortgage banks do not take deposits and finance their loan portfolio with corporate bonds. Households may borrow up to 80% of the value of residential property and thus minimizes default risk for the lender.
The financial sector requires stricter regulation than other industries because of its importance to the overall economy. As a result of the global financial crisis, a renewed focus has been placed on financial sector regulation. Whilst the Danish government temporarily provided exceptional measures in the form of general and individual state guarantees to cover secured and unsecured debt and institutional default, capital and liquidity requirements for financial institutions were tightened. The result is a strong framework to absorb unpredictable shocks.
Bank Regulation and Resolution
In Denmark, financial institutions in distress are resolved without public funding, with creditors and owners bearing the costs. The Single Resolution Mechanism implemented throughout the EU Banking Union does not apply to the Danish financial sector. However, the financial safety-net including bank resolution and deposit insurance is shaped by the Single Rulebook in line with EU legislation.
Danmarks Nationalbank (DN) is the monetary authority and lender of last resort. To support a stable financial system and maintain public confidence, the Nationalbank may grant Emergency Liquidity Assistance (ELA) against appropriate collateral to solvent financial institutions having liquidity challenges. Central Bank intervention by special liquidity provisioning is however subject to strict administrative and financial terms and conditions.
Finansiel Stabilitet is together with Danish Financial Supervisory Authority (DFSA) the resolution authority of Denmark. Through the restructuring and resolution of distressed financial institutions, the agency contributes to financial stability. Alongside the provision of capital and liquidity, this also includes Bank Recovery and Resolution (BRRD) mechanisms. The Finansiel Stabilitet may assume control over a licensed and supervised institution in matters it deems appropriate. Adequate resources, knowledge, capital and management is provided to resolve possible institutional challenges. History shows that, when and where appropriate, Finansiel Stabilitet institutes liability lawsuits against bank management of failed financial institutions. Such legal action sends out a strong signal to society that wrongdoing is punished while it minimizes financial risk to taxpayers and society.
Bank Deposit Protection in Denmark
A critical concern during most financial crises is that uninsured depositors panic and initiate a run on banks, causing the financial system to destabilize or collapse. As we saw during the global financial crisis, public funds were being used to rescue financial institutions around the world. Deposit insurance limits were raised and its efficiency improved. Still, it could not avoid a sharp decline in global wealth. As a result, the regulatory framework had to be sharpened.
Guaranteed deposits are repaid to eligible account holders of licensed and supervised financial institutions who suspend payments or is declared bankrupt. The Danish deposit guarantee fund covers account holders in 144 deposit taking, mortgage and credit institutions and exclusively applies to fund members. The fund provides general coverage supplemented with coverage of pension savings, deposits that serve social purposes, deposits as a result of damages or compensation for criminal injuries or wrongful conviction, and deposits resulting from real estate transactions. Additionally, securities that cannot be returned to creditors may entitle investors to compensation. The following limits apply:
- General Coverage: 100.000 Euro
- Pension Savings: 150.000 Euro
- Social Purposes: 150.000 Euro
- Private Real Estate Transactions: Up to 10 Million Euro
- Investor Coverage: 20.000 Euro
Deposit protection in Denmark is subject to strict rules. The Act on Depositor and Investor Guarantee Schemes identifies ineligible deposits and excluded depositors. In line with other European DGS schemes deposits or cash funds of which the owner has never been identified, and deposits, cash funds and securities that originate from transactions in connection with which a judgment concerning money laundering has been delivered are not covered. Furthermore, ineligible creditors include banks, mortgage credit institutions, investment firms, insurance companies, public authorities and financial institutions. Especially the latter deserves attention due to its extensive definition.
Crisis Management and Case Studies
Bank resolution objectives are correlated with early intervention and recovery planning. Breaches of legal requirements allow the regulator to impose sanctions, penalties and mandator adjustments on the financial institution. These include but are not limited to update of the resolution and recovery plan, to convene a meeting of shareholders, to order the resignation or replacement of a board member or management, to restore debt, or to change its operation structure. Additional remedial measures may restrict activities, suspend dividend, or even to withdraw the license of the bank.
The current Danish bank resolution framework was tested when the cooperative banks J.A.K. Slagelse (2015) and Kobenhavns Andelskasse (2018) were failing or likely to fail. Finansiel Stabilitet intervened. It replaced management and activities eventually stopped. Resolution costs were borne by capital owners. Subordinated debt and senior creditors were subject to bail-in procedures for loss absorption.
J.A.K. Slagelse: Recovery measures remained unsuccessful. 4.000 depositors held an estimate of 36 million euro in debt. The resolution plan included the replacement of management, set up of the bridge bank Broinstitut I A/S. Bank activities initially continued and services were not interrupted until the institution was wound up.
Kobenhavns Andelskasse: An on-site inspection revealed significant shortcomings in the internal organization of the bank. Breaches of financial regulation and an unsustainable business model justified intervention. 1.940 depositors held around 46 million euro at the cooperative. It was held in the public interest to maintain the critical functions of the bank and continue deposit and payment facilities. Andelskasse was bailed-in and ownership transferred to Broinstitut II A/S.
Sampo Pank Estonia: Even though no resolution steps were taken, several vulnerabilities in the Nordic payment system were exposed. AS Sampo Pank was acquired by Danske Bank, the largest Danish lender. It is estimated that 200 Billion Euros were laundered through the non-resident bank department via the Estonia branch. International legal action, of which the outcome is uncertain, is ongoing.
Asset Recovery for Ineligible and International Creditors
Bank bail-in and the principle that no creditor should be worse off than in liquidation (NCWOL) are the prominent and preferred ways to handle the resolution of supervised financial institutions in Denmark. This is furthered by the quest for equal treatment and the doctrine of pari passu as laid down in traditional creditor and insolvency hierarchies. Bail-in and liquidation procedures prioritize secured creditors over unsecured claimants, subordinated debt holders and shareholders. Deposit insurance provides otherwise unsecured account holders with external protection of their account balance. This means that creditors in need of a special treatment must substantiate their claim outside the parameters of the applicable banking laws. Arguments and the individual position must then overrule the binding rules as laid down in the bank resolution framework. This is only possible in exceptional circumstances.
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