The Danish Financial Stability Company - Experiences with bank crisis resolutions and bank packages

1. The Danish Financial Stability Company - Experiences with bank crisis resolutions and bank packages v/Jimmy Scavenius, Senior Legal Counsel, Finansiel Stabilitet A/S (the Financial Stability Company)

2. The Financial Stability Company - In brief • October 2008: The Financial Stability Company wasfounded • January 2009: 1 CEO, 2½ employees, and 1 distressed bank • Medio 2011: Reorganization of the group and a new joint companydomicile • October 2011: 1 CEO, 30 employees, 1 group with approx. 800 employees and 11 distressed banks

3. Organisation chart of the Financial Stability Company

4. Legislationfrom 2008 til 2011 – In brief • October 2008The Bank Package (Bank Package I) - general stateguarantee. Terminated end September 2010 • February 2009Credit Package (Bank Package II) - individualstateguarantee and capitalenjectio (Tier 1) from the State. Terminated end December 2010 • October 2010Exit Package (Bank Package III) – haircut on unsecured senior loans and depositsabove EUR 100,000 • Juni 2011Amendment to the Exit Package - opportunity for the Danish Deposit Guarantee Fund to supply funds or provide guaranteeagainst losses to a buyer bank • August 2011ConsolidationPackage (Bank Package IV) – compensation from the Danish Deposit Guarantee Fund and the Financial Stability Company. Extension of individualstateguarantee

5. ”Costumers” so far – thosewhodidn´tmake it • The Bank Package (Bank Package I): • Ebh Bank (21 November 2008) • Loekken Sparekasse (2 March 2009) • Gudme Raaschou Bank (16 April 2009) • Fionia Bank (28 May 2009) • (Roskilde Bank (10 August 2009)) • Capinordic Bank (11 February 2010) • Eik Bank (14 October 2010) • Eik Banki (14 October 2010) • Exit Package (Bank Package III): • Amagerbanken (6 February 2011) • Fjordbank Mors (24 June 2011) • Consolidation Package (Bank Package IV): • Max Bank (8 October 2011)

6. Exit Package (Bank Package III) • The Exit Package has the following scope: • The winding-up scheme under the Exit Package is voluntary for distressed banks • If a bank no longer meets the statutory solvency requirement the Danish FSA will set a time limit • Within this time limit the bank can make private arrangements or enter into an agreement with the Financial Stability Company • The Financial Stability Company sets up a new subsidiary – new bank - with the purpose of taking over all assets and a part of the liabilities of the distressed bank over night (during a weekend) • The new bank will open Monday morning and the depositors will have access to their accounts.

7. Exit Package(Bank Package III) • The Exit Package allows for potential losses to senior creditors and major depositors (above 100,000 EUR) as well as shareholders and subordinated debt • Remainingliabilitiesstays in the distressed bank, which is declaredbankrupt • Provisional dividend is paid to creditors with remaining senior claims • Preclusiveadvertisement for creditors to lodgeclaimswithin 3 months from the transfer • The final amount to be paid to major depositors and other creditors will be determined within three months from the take-over by valuers(accountants) appointed by the Institute of State Authorized Public Accountants in Denmark. • The Danish Deposit Guarantee Fund grants a guarantee to the Financial Stability Company in case it turns out that the assets wereaquired at a toohighvaluecausing losses afterwinding up the new bank

8. Amendment to the Exit Package (Bank Package III) – June 2011 • The Danish bank packages state that private solutions must always have priority before a bank turns to the use of resolution under the Financial Stability Company, i.e. the Exit Package • The Amagerbanken-Case showed that it was not possible to find a private solution • To make private solutions more attractive a compensation scheme (amendment to the Exit Package) was passed through the Parliament in June 2011 • The scheme implies that the Danish Deposit Guarantee Fund can choose to supply funds or provide guarantees against losses, when activities of a distress bank are being transferred to another bank • It is a condition for the use of the compensation scheme that the Danish Deposit Guarantee Fund finds the solution more attractive, financially, than a resolution under the Financial Stability Company, i.e. the “original” Exit Package model

9. Amendment to the Exit Package (Bank Package III) – June 2011 • The compensation scheme is financed by the contributing banks (financial sector). Thus, the costs of the compensation scheme are born by the financial sector itself • Despite the compensation scheme – Fjordbank Mors (June 2011) was transferred to the Financial Stability Company in accordance with the “original” Exit Package model

10. Consolidation Package(Bank Package IV) – August 2011 • The Consolidation Package has the following scope: • Strengthening of the compensation scheme to make it more attractive to take over distressed banks • Removing barriers to mergers between banks by offering an individual state guarantee with higher premium – Not yet approved by the EU Commission • Financing through contributions to the Danish Deposit Guarantee Fund to even out sector payments to the scheme as well as establishing a possible consolidation fund • Preparing future regulation on Systemically Important Financial Institutions (SIFI) in Denmark

11. Consolidation Package (Bank Package IV) – August 2011 • Re 1. • Strengthening of the compensation scheme in the Exit Package to make • it more attractive to take over distressed banks – two models: • Model 1 • The Financial Stability Company may provide compensation if a sound bank is willing to take over the entire distressed bank • It is a condition that the Danish Deposit Guarantee Fund provides compensation as well • The Financial Stability Company will state compensation on the basis of the same valuation of assets and liabilities of the distressed bank as the determination compensation from the Danish Deposit Guarantee Fund under the amended Exit Package

12. Consolidation Package (Bank Package IV) – August 2011 • Re 1. • Strengthening of the compensation scheme in the Exit Package to make • it more attractive to take over distressed banks – two models: • Model 2 • Part of the distressed bank might be resolved under the Financial Stability Company – new subsidiary - with compensation from the Danish Deposit Guarantee Fund while a sound bank takes over the sound part of the distressed bank • Both models build on the compensation scheme in the Exit Package. In both models the state can contribute with the expected loss on an individual state guarantee if the bank were to be wound up under the Exit Package • Max Bank – 8 October 2011

13. Consolidation Package (Bank Package IV) – August 2011 • Re 2. • Removing barriers to mergers between banks by offering an individual • state guarantee with higher premium • The purpose is to support consolidation among banks by introducing a scheme where banks may apply for an extension of an existing individual state guarantee in connection to a merger until the end of 2013 • New individual state guarantees can be issued if a merger activates “change of control” conditions on senior loans • Not yet approved by the EU Commission

14. Consolidation Package (Bank Package IV) – August 2011 • Re 3. • Financing through contributions to the Danish Deposit Guarantee Fund • to even out sector payments to the scheme as well as establishing a • possible consolidation fund • The existing method of financing the Danish Deposit Guarantee Fund may in the event of considerable losses of the Danish Deposit Guarantee Fund influence the solvency of banks significantly • Furthermore the new EU Directive is expected to entail that the assets of the Guarantee Fund are to be increased considerably • Therefore it is the intention to change the financing of the fund so that it will be based on insurance-like financing with annual premiums

15. Consolidation Package (Bank Package IV) – August 2011 • Re 4. • Preparing future regulation on Systemically Important Financial • Institutions (SIFI) in Denmark • An expert committee with an independent chairman will be set up under the auspices of the Ministry of Economic and Business Affairs • Based on the coming EU regulation the expert committee must clarify: • Which criteria are to be met for a bank to be a Danish SIFI • Which requirements are to be set for SIFIs. Efforts should be made to ensure equal competition between SIFIs and other credit institutions in Denmark, as well as fair conditions of competition compared with SIFIs countries • Which instruments may be used in relation to SIFIs which experience difficulties • The expert committee must report to the Ministry of Economic and Business Affairs in 2012

16. Experience - Winding up/divestment • Requirementsabouthighlending rates, lowdeposit rates and pooraccess to new granting of creditsbrings to the widestpossibleextentcostumers to find a new bank on theirowninitiative • In the process of selling the good parts of the bank (the ”green bank”) the Financial Stability Company pursues a sale including at least all private costumers • Exposureswithincertainbusinesses is exceptionallydifficult to sell in the currentmarket (agriculture and real estate) • Winding up shallbepushedthrough in consideration of minimisingdistortion of competition and economicalconsiderations • The Financial Stability Company willprobably live longer thanfirstexpected

17. Experience - Whatwentwrong? • Lendingactivitieswerecharacterized with bad loanquality and granting of creditconflicting with the credit policy • Insufficient credit management and bad credit administration • Significantexposureswithin the real estatemarket

18. Experience – Crisisindicators so far • Verystrong management • Veryweak management • Local banks doing business far away from home • High exposureswithin the real estatemarket

19. Did it go as expected? • More distressed banks thanexpected • More legislationthanexpected • It has shown more difficult to wind up the bad parts of the bank (the ”red bank”) thanexpected • We have hardlyseen the last ”costumer” in the Financial Stability Company – nor the last bank package