Denmark’s banking system is a key pillar of the country’s economy, contributing to stability and growth. However, the global financial crisis and subsequent economic downturns have raised concerns about the resilience of banks in Denmark and the potential risk to international creditors. The primary legal framework governing the Danish banking sector is the Danish Financial Business Act. The Act contains provisions relating to bank licensing, supervision, capital adequacy, and resolution planning. In cases of bank failure, the Act, along with EU regulations such as the Bank Recovery and Resolution Directive (BRRD) and the Deposit Guarantee Schemes Directive (DGSD), provides guidelines on the processes and measures to be taken.
Bank failure in Denmark is defined as the inability of a bank to meet its obligations to depositors, creditors, or other stakeholders, or when it is deemed unable to maintain the required levels of capital and liquidity. The Danish Financial Supervisory Authority (FSA) is the primary regulatory body responsible for determining bank failure, following a thorough assessment of a bank’s financial situation, risk profile, and management practices.
The Danish FSA has a legal mandate to supervise banks and ensure their compliance with the applicable laws and regulations. The FSA evaluates a bank’s financial health, risk management, and governance structure, and can impose sanctions or corrective measures if necessary. Resolution planning is an integral part of the supervisory process, aiming to preserve critical banking functions and ensure the continuation of the organization during financial distress.
In Denmark, the Financial Stability Company (FSC) is the designated resolution authority responsible for managing the resolution process of failing banks. The FSC works closely with the FSA and other relevant authorities to ensure an efficient and orderly resolution, following the guidelines provided by the BRRD.
Denmark offers a range of resolution tools to reorganize, recapitalize, restructure, or dissolve a failed bank. These include the sale of the business, the establishment of a bridge bank, asset separation, and bail-in measures. The choice of the resolution tool depends on the specific circumstances of the bank in question and the objectives of the resolution process.
To protect account deposits and other creditor interests, Denmark has implemented the Deposit Guarantee Scheme (DGS), which covers deposits up to EUR 100,000 per depositor per bank. The DGS is funded by contributions from the participating banks and is designed to provide timely reimbursement to depositors in the event of a bank failure.
The Danish regulatory framework ensures that non-viable firms exit the market in an orderly manner, minimizing the impact on the financial system and other stakeholders. This involves a combination of supervisory action, resolution planning, and cooperation among the various authorities.
In cases where resolution is not feasible or appropriate, the liquidation of a failed bank in Denmark follows the general insolvency rules under the Danish Bankruptcy Act. The liquidation process involves the appointment of a trustee who is responsible for the administration of the bank’s assets and the distribution of proceeds to the creditors according to their priority.
To safeguard their position during the stages of statutory administration, deposit insurance, and bank liquidation, account holders of a failed bank in Denmark must take several steps. First, they should maintain up-to-date records of their account balances and transactions to facilitate the reimbursement process. Second, account holders must ensure that their contact information is current with the bank, enabling prompt communication from the resolution or liquidation authorities.
In the event of a bank failure, account holders should closely follow instructions and updates from the FSA, FSC, and the Deposit Guarantee Scheme. They may be required to provide documentation or complete specific forms to claim their insured deposits. Additionally, account holders should monitor the progress of the bank’s resolution or liquidation process, as it may have implications for their claims and financial positions.