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The Danish Approach to State Aid in the Financial and Economic Crisis

Learn about the Danish Competition Authority's approach to state aid during the financial and economic crisis, including credit packages I and II, rescuing and restructuring financial institutions, and the focus on financial stability.

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The Danish Approach to State Aid in the Financial and Economic Crisis

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  1. The Danish Competition Authority The Danish Approach to state Aid and the financial and economic crisis • CREDIT Package I and II • and rescuing /restructuring of • Financial institutions

  2. The Danish Approach to State Aid • Less and better targetted aid • Horizontal purposes – Community interest • Market failure • Necessary and proportional • Temporary • Objective and non discriminatory • Transparent • Strict State Aid control

  3. State Aid - the Financial and economic crisis • Focus on financial stability – systemic difficulties • Common coordinated approach • Commission state aid control • Common rules • Prevent distortion of markets and trade

  4. Credit package I – October 2008 Lehman Brothers ++ Roskilde bank +? Funding Crisis – lack of confidence – no interbank lending Depositors and creditors Unlimited guarantee for depositors and creditors until 2010 The Banks finance 35 billion – top up by the state (3600) Only healthy solvent banks – Private Contingency Association Not solvent banks taken over by the Winding up company Behaviour requirements The Financial Stability Act

  5. Credit package IIThe financial market - the financial and economic crisis • The Credit squeeze and Crunch • Access to credit for undertakings and citizens • Credit to the real economy • Systemic problem for healthy institutions / companies • Solvency requirements: tier one capital /RWA • Increase solvency – tier one capital • Increase tier one capital 100 billion DKK • Gearing 1:7 – credit amount to 700 billion DKK • Percentage of tier one capital increased to 12 • Tier one = equity + hybrid capital

  6. Credit package IIAct on state capital injections in Credit institutionsAmendment of ACT on financial stability • Capital injection banks 75 BDKK – Mortgage 25 BDKK • Hybrid tier one capital – Average interest 10 percent (rating) • Only healthy solvent institutions – ECB rating • Risk evaluation • Exit clause – Exit very important • Percent of tier one capital up to 12 percent • Behaviour restraints – cap on salaries and upsides / options + • Individual loan guarantees – maturity after 31. 12. 2010 • Cash grant payment to take over banks in default • Export loans on 20 billion DKK • Export credit guarantee to short term export markets

  7. State Aid Rules • Covered by State Aid provisions 87 (1) + 88 (3) • State capital injection + guarantees • Systemic failure – 87 (3) b Aid to remedy a serious disturbance in the economy of a member state. • Commission Communication of 13 October and 5 December 2008. • Specific rules for guarantees, capital injection, liquidity • Definition of healthy and not healthy financial institutions

  8. Key questions • Definition: healthy – versus - unhealthy credit institutions • Individual notification of unhealthy banks - restructuring • Capitalisation vs. overcapitalisation – the 12 pct. • Arguments for necessity and systemic failure • AID = the minimum necessary • The premium on hybrid tier 1 capital – rating categories • The premium on individual guaranties – EBC rules • No cherry picking – between two types of guaranties • Individual guarantee scheme approved for 6 months • Individual notification of cash for take over • Export loans notified through OECD channels • Short term export credit approved

  9. The Process – Credit package II 14 January – 3 February 2009 • Task force structure • Objective: the package in conformity and approved • Interactive multi level game DK – EU • Notified 22 January 2009 approved 3 February 2009 • 4 batches of questions, one meeting, 25 mails • 120 hours – 16 days – 10 days

  10. Learning? • Difficult rules – difficult to lift burden of proof • Task force structure - all competences on board • Keep very close contact to Commission services • Multilevel game – flexible flow • Coeur, crâne et courage

  11. Roskilde bank, EBH bank, Fionia bank • Roskilde bank – Being winded up by the winding up company • Guarantee to depositors and creditors • First Danish bank in default • State Aid to rescue and restructuring • EBH bank – been taken over by Winding up company • Fionia bank • Solvency requirement – 13 percent of RWA – risk profile • Capital injection + liquidity – Winding up company • Call options • Rescue and Restructuring Rules • Arguments for necessity – systemic default – proportionality (minimum necessary aid), adequate instruments and behavioural restraints • Long term viability plan – after 6 months

  12. Questions?

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