Denmark Loan Bills Temporary Credit Facility

The central bank said that the purpose of the loan bills facility was to spur interbank lending rather than inject central bank liquidity: “Extensive use of the credit facility was not a criterion of success” (Overview of Temporary Facilities, 1). Roughly DKK25-30 billion in loan bills were issued in 2008-09. The IMF and other observers concluded that loan bills were not widely used (Carstensen 2011, 108). In September 2008, just a few months after the loan bills scheme was first implemented, the government created the excess-capital facility in part because of the failure of the loan-bill scheme to meet banking needs that were intensified after the fall of Lehman Brothers. In October, the government guaranteed bank debt, including interbank debt, obviating the need for the program.

A 2009 report from Danmarks Nationalbank elaborates on its disappointment with the program, noting that the loan-bill scheme “assume[d] that the banking institutions want to lend to each other,” however, “confidence among the banking institutions weakened during the summer of 2008 as the scope of the problems in the financial sector became more apparent” (Financial Stability 2009, 1st Half, 19). The purpose of the excess-capital facility in particular was to prevent banking institutions with adequate capital from incurring liquidity problems as a result of insufficient assets, which could be pledged as collateral to Danmarks Nationalbank. Unlike the loan-bill scheme, the excess-capital scheme was meant to help institutions access loans raised directly from Danmarks Nationalbank—not from other banks. To achieve this, the excess-capital facility allowed Danmarks Nationalbank to offer uncollateralised credit in the form of credit line, the value of which depended on the applying institutions’ excess capital adequacy (Financial Stability 2009, 1st Half, 20). The credit line could be counted toward the institution’s statutory liquidity requirement (Financial Stability 2010, 66).

The International Monetary Fund (IMF) has noted that the loan bills scheme was unsuccessful in part because “it failed to address banks’ strong liquidity preference and aversion to counterparty risk” (IMF 2008, 12-13). Others have argued that the temporary credit facilities in general had limited usage because Denmark was simultaneously experiencing a currency crisis. The combination of not being a Eurozone member and having a fixed exchange rate regime may have led to high demand for euro and dollar liquidity by Danish banks, and increasing pressure on the Danish krone (Woll 2014, 158). As a result, monetary policy instruments used by the Danish central bank had less of an impact on the banking industry than the instruments used in the United States or UK (Woll 2014, 158). The Danish government has also attributed this relative lack of temporary-credit-facilities usage to the success of the Original Guarantee Scheme under Bank Package I. They argue that as a result of Bank Rescue Package I, the “banking institutions started lending to each other in the money market again” and the “need to borrow from Danmarks Nationalbank [became] modest” (Financial Stability 2009 1^st half, 21).