Dias nummer 1 - SNS

Handling of failed banks in Denmark 2008-
2011.
-Different regimes through the crisis
Julie Galbo
Deputy Director General
The Danish FSA

Bank Package I
• Bank Package I introduced a general state guarantee for all depositors
and holders of senior debt. The general state guarantee expired on the
30 th of September 2010.
• The financial sector paid a guarantee fee of DKK 15 billion over the 2
years the guarantee ran.
• Further the Financial Stability Company was created to take-over and
wind-up ailing banks.
• The financial sector agreed to cover the first DKK 10 billion in loses
incurred by the Financial Stability Company resulting from the take-over
of ailing banks.

Bank Package II
• The act was passed on February 3, 2009.
• The package made it possible for solvent credit institutions to apply for capital injections from the state in
the form of hybrid capital.
• When the scheme expired in 2009 a total of DKK 46 billion in capital injection had injected into 43 credit
institutions.
• In some cases the capital injections where attributed with both an optional and mandatory conversion
mechanism – conversion of hybrid capital to equity – a close resemblance to contingent capital.
• To date optional conversion has been excised in the following cases:
• Skælskør Bank (Merged with now failed Max Bank)
• Aarhus Lokalbank (Has announced plans for a merger with Vestjysk Bank).
• Vestjysk Bank (Has announced intent to convert in connection with the planned merger with Aarhus Lokalbank)
• As a part of this package, a scheme under which the Financial Stability Company could, on the basis of
an application, enter into agreements for the provision of individual government guarantees for existing
and new unsubordinated, unsecured debt with a maturity of up to three years issued by credit institutions.
• As of the 10 th of January 2012 the total outstanding debt with individual government guarantee was DKK
168 billion.

Bank Package III
• The act was passed in June 2010.
• The law came into effect after the expiry of the general state guarantee on September 30, 2010 and introduced a winding-up
scheme on handling of ailing banks.
• Purpose: Having a resolution regime for the handling and take-over of ailing banks, where shareholders, subordinated
capital, senior creditors and large depositors will bear losses. The regime does not include an either implicit nor explicit state
guarantee.
• As part of the regime all banks are required to have systems in place, that makes it possible to
• calculate each clients net-position at any point in time.
• create an opening balance in order for a immediate valuation of the banks assets.
• The requirements makes it possible to valuate a bank and impose haircuts on credit in the course of a weekend.
• An ailing bank can be taken-over in course of one weekend and thereby preserving the value of the bank and thus reducing
cost on society as such.
• Thus an ailing bank taken-over will open for business on Monday morning. Clients can continue to carry out their normal
day-to-day banking business. Clients will not need to find a new bank – established loans etc. will not be terminated. Credit
cards and other payments will proceed in operation as usual.
• Winding-up costs exceeding the costs borne by equity, subordinated capital, senior creditors and large depositors are
covered by a ring-fenced winding-up department of the Danish DGS.
• Hence, the financial sector – not taxpayers – are covering the marginal risk of winding-up.
• The scheme has so far been applied twice - on Amagerbanken (in February 2011) and Fjordbank Mors (June 2011) – Both
banks where valuation and haircuts imposed on creditors in one weekend.
• The DGS can use expected loss as compensation for bank willing to take over ailing bank.

Bank Package III -Take-over of an ailing bank – Overview
Ailing Bank
The Financial Stability
Company creates a new subsidiary
New Bank
All assets are transferred to New Bank
realisation value
Unsecured liabilites are transferred prorata
to New Bank
Excess
liabilities
New Bank
Estate after Ailing Bank

Bank Package IV
• Strengthening of the compensation scheme to make it more attractive for
banks to take over ailing banks
i. Model I: A bank takes over the entire bank in distress. In addition to the
compensation scheme from the Guarantee Fund for Depositors there will be state
compensation from the Financial Stability Company. The maximum amount of the
ii.
compensation is the loss under alternatively Bank Package III.
Model II: A bank buys ’the green part’ of the bank in distress - assets, liabilities and at
least all private customers. The red part incl. loans with state guarantee is taken over
by the Financial Stability Company.
• Prolonging of individual state guarantee scheme in mergers. Application
deadline: End of 2013.
i. The merger triggers the payment of senior loans. The guarantee will then hold the
ii.
same maturity and amount as the loan due for payment. Ceiling: DKK 10 bn.
Prolonging of existing individual state guarantees for up to 3 years in case at least
one of the banks in the merger has a state guarantee. Ceiling: DKK 40 bn.
• Bank Package IV, model II was effectively applied in connection with the
collapse of Max Bank, October 9 2011.
• Regional lenders Vestjysk Bank and Aarhus Lokalbank have recently
announced a merger. As part of the merger, the merged bank expects to
benefit from the possibility to get a prolonging of existing individual state
guarantees.

Resolution regime
• When a bank no longer meets the statutory solvency requirement the Danish
Financial Supervisory Authority sets a timelimit
• Within that time the bank can make private arrangements. If not possible, the
bank will enter into an winding-up agreement with Finansiel Stabilitet
Banks in distress
- Capital requirements has to
be met within a time limit
- Efforts to find a private
solution
Bank package 3:
- No private solution is found
- Shareholders equity and
subordinated debt is lost
- Haircut on senior debt and
other simple claims
Bank package 4:
- Compensation scheme to
facilitate a private solution
- Shareholders equity and
subordinated debt is lost
-No losses on simple claims
and senior debt
-Possible extension of state
guarantees if change of
control

Capital requirement, failed banks and dividend pay out
• Under the different Bank packages, Danish banks have failed due to
pillar II capital requirements.
• As a result, dividend pay out has been relatively high, although
costs/losses associated to the un-winding of failed banks has
suffered to deteriorating asset prices.
• Preliminary dividend pay out for banks handled under Bank package
III has been relatively low, due to very conservative valuation
principle (assets are valued at immediate gone-concern realisation
value).
• However final dividend pay out have been relatively high.
• Amagerbanken: Preliminary dividend of 59 pct.
Dividend after due diligence of 84 pct.
• Fjordbank Mors: Preliminary dividend of 74 pct.
Dividend after due diligence 90 pct.

1. Danish banks in distress since 2008
Private solutions:
Share of sector
balance in pct.
Banks taken over by The
Financial Stability Company:
Share of sector
balance in pct.
Bank
package
jan-08 bankTrelleborg 0.19 aug-08 Roskilde Bank 0.80
sep-08 Bonusbanken 0.04 nov-08 EBH Bank 0.18 I
oct-08 Forstædernes Bank 0.68 feb-09 Fionia Bank 0.69 I
oct-08 Lokalbanken i Nordsjælland 0.11 mar-09 Løkken Sparebank 0.04 I
nov-08 Sparekassen Spar Mors 0.02 apr-09 Gudme Raaschou Bank 0.10 I
feb-11 Sparekassen Midtfjord 0.01 feb-10 Capinordic Bank 0.03 I
feb-11 Lunde-Kvong Andelskasse < 0.01 sep-10 Eik Bank 0.40 I
jun-11 Fruering-Vitved Sparekasse < 0.01 sep-10 EIK Bank Danmark 0.27 I
jul-11 Ryslinge Andelskasse < 0.01 feb-11 Amagerbanken 0.66 III
jun-11 Fjordbank Mors 0.31 III
oct-11 Max Bank 0.24 IV
9

Provisional results from the Bank Packages
Bank Package I
DKK, Billion
Guarantee fee from the financial sector 15.0
Losses/costs from unwinding failed banks -12.0
Loss guarantee from the financial sector 10.0
Settlement, Roskilde Bank -10.5
Result from Bank packages I 2.5
Bank Package II
DKK, Billion
Net interest income 9.67
Credit loss on capital injections -2.58
Result from capital injections 7.09
Individual state guarantees
Total income 3.45
Losses from individual government guarantee -2.98
Result from individual government guarantee 0.47
Provisional total result from the Bank packages 10

Danske Bank and Nordic Peers CDS Spreads
Bp.
350
300
250
200
150
100
50
0
Danske Bank Nordea SEB Svenska Handelsbanken Swedbank Deutsche Bank
Black vertical line represents the time of Amagerbanken’s collapse, February 6 2011
Orange vertical line represents the time of Fjordbank Mors’ collapse, June 24 2011
Blue vertical line represents the time of Max Bank’s collapse, October 9 2011

Danske Bank vs. Nordea
• Danske Bank’s CDS spread has increased relatively more compared to its
Nordic peer Nordea since October 2010.
• PB3 in effect from October ´10, Amagerbanken collapsed Feb. ´11
Bp.
180,0
160,0
140,0
120,0
100,0
80,0
60,0
40,0
20,0
,0
Moody’s
downgrade
Bank Package
IV is passed
-20,0
01/00/yyyy 01/00/yyyy 01/00/yyyy 01/00/yyyy 01/00/yyyy 01/00/yyyy 01/00/yyyy
Note: The jump from September 1 is boosted by the lack of Nordea CDS quotes from Bloomberg

5-year CDS for Danske Bank and Denmark
Bp.
350,0
300,0
Danish economy shows signs of
weakness. At the same time, the EU
crisis seriously starts to show.
250,0
200,0
150,0
Irish exposure towards Danske Bank
100,0
50,0
,0
00-yyyy 00-yyyy 00-yyyy 00-yyyy 00-yyyy 00-yyyy 00-yyyy
Danbnk CDS EUR SR 5Y corp
DENK CDS USD 5Y CORP

Danske Bank CDS spread explained
• Danske Bank’s CDS spreads was higher than Nordic peers before Bank
Package III was applied for the first time.
• Danske’s exposure to Ireland and the very high impairment ratio has
resulted in a higher CDS spread. Further, the sovereign debt crisis has a
direct impact on Danske Bank through its Irish exposure.
• The CDS spread first started expanding in mid November 2010 following
the Irish government’s formal request for a bailout from EU and IMF.
• The widened spread towards its Nordic peers can also be attributed to
worse macroeconomic development in Denmark compared to Sweden and
Norway.
• Moody’s, S&P, and Fitch all have Danske Bank on ‘negative’ outlook,
whereas Nordea is on ‘stable’. The downgrade of Danske Bank after BP3
was attributed to a reduced systemic support.

Senior Unsecured Funding
• Funding prices are seen highest for Danske Bank compared to its Nordic peers.
Percent
5,25
4,75
4,25
3,75
3,25
2,75
2,25
1,75
Danske Bank DnB NOR Bank ASA Nordea Bank AB
Skandinaviska Enskilda Banken AB Svenska Handelsbanken AB Deutsche Bank
Black vertical line represents the time of Amagerbanken’s collapse, February 6 2011
Orange vertical line represents the time of Fjordbank Mors’ collapse, June 24 2011
Blue vertical line represents the time of Max Bank’s collapse, October 9 2011

00 yy
00 yy
00 yy
00 yy
00 yy
00 yy
00 yy
00 yy
00 yy
00 yy
00 yy
00 yy
00 yy
Cash-prices of Danske Bank’s spread compared to its peers after Amagerbanken’s default
• Cash-prices of Danske Bank’s are seen rising more compared to its peers after Amagerbanken’s
default
Danske Bank trading against Nordic Peers (Maturity 2014) February to September 2011
ASW mid (bps)
350,0
ASW mid (bps)
160,0
Moody’s
downgrading
300,0
110,0
250,0
60,0
200,0
150,0
Bankpakke III is
passed
Amagerbanken’s
default
10,0
00 yy 00 yy 00 yy 00 yy
SHBASS '14 (AA-/Aa2)
DANBNK '14 (A/A2)
DNBNO '14 (A+/Aa3)
NBHSS '14 (AA-/Aa2)
100,0
SEB '14 (A+/A1)
50,0
,0
DANBNK '14 (A/A2) DNBNO '14 (A+/Aa3) NBHSS '14 (AA-/Aa2)
SEB '14 (A+/A1)
SHBASS '14 (AA-/Aa2)
Source: Bloomberg

4. Distressed banks
Lending growth
100
pct.
Roskilde Bank
Fionia Bank
90 Løkken Sparekasse EBH Bank
80
Bank Trelleborg
Bonusbanken
Spar Mors Sparekasse Amagerbanken
70 Max Bank
Fjordbank Mors
60
EIK Bank Danmark Banking sector average
50
40
30
20
10
0
-10
-20
1999 2000 2001 2002 2003 2004 2005 2006 2007 2008
Exposure to commercial property
60
pct.
Roskilde Bank
Fionia Bank
55 Løkken Sparekasse EBH Bank
50
Bank Trelleborg
Bonusbanken
Spar Mors Sparekasse Amagerbanken
45 Max Bank
Fjordbank Mors
EIK Bank Danmark Banking sector average
40
35
30
25
20
15
10
5
0
1999 2000 2001 2002 2003 2004 2005 2006 2007 2008
A lesson to be learned …