Denmark Excess-Capital Temporary Credit Facility

Purpose

To increase access to loans from Danmarks Nationalbank to support liquidity of banks.

Key Terms

Announcement Date

September 26, 2008
Operational Date

September 26, 2008
Issuance Window Expiration Date

Jan. 30, 2009 (initial) Sept. 30, 2010 (second) Feb. 26, 2011 (final)
Legal Authority

N/A
Peak Utilization

About DKK14 billion taken out in credit lines but rarely utilized (exact number pending)
Participants

Several (exact number pending)
Administrator

Danmarks Nationalbank

During the interbank market freeze following the Lehman Brothers collapse in September 2008, Denmark’s central bank, Danmarks Nationalbank, used a series of unconventional monetary policy instruments to increase market liquidity. One such action included the introduction of the excess-capital temporary credit facility, also known as the solvency scheme. Under this facility, credit lines from Danmarks Nationalbank could be provided to banks and mortgage-credit institutions on the basis of their excess capital adequacy, calculated as the difference between their base capital and their capital need. The purpose of this facility was to ease the tight liquidity situation by providing access to credit directly from Danmarks Nationalbank, thus aiding the liquidity of banks with adequate capital but insufficient assets that are eligible as collateral. The program ran from September 26, 2008, to February 26, 2011, after being extended twice. The facility effectively assisted some banks with their statutory liquidity requirements, and few banks had to draw on their credit lines throughout the duration of the program.

During the interbank market freeze following the collapse of Lehman Brothers in September 2008, Denmark’s central bank, Danmarks Nationalbank, used a series of unconventional monetary policy instruments to increase market liquidity. One such action included the introduction of the excess-capital temporary credit facility, also known as the solvency scheme. Under this facility, credit lines from Danmarks Nationalbank could be provided to banks and mortgage-credit institutions on the basis of their excess capital adequacy, calculated as the difference between their base capital and their capital need. The purpose of this facility was to ease the tight liquidity situation by providing access to credit directly from Danmarks Nationalbank, thus aiding the liquidity of banks with adequate capital but with insufficient assets that are eligible as collateral. The program ran from September 26, 2008, to February 26, 2011, after being extended twice.

The program assisted some banks with their statutory liquidity requirements, and few banks had to draw on their credit lines. Both the Danish government and critics agree that the lack of usage of temporary credit facilities in Denmark was in part due to the more successful and more widely used bank rescue packages that guaranteed interbank loans.

Key Design Decisions

Purpose of MLP 1

The first temporary credit facility was the loan-bills scheme, introduced in May 2008. The excess-capital facility was implemented months later, in September 2008, driven in part by the initial failure of the loan-bill scheme to meet banking needs that were intensified after the fall of Lehman Brothers. A 2009 report from Danmarks Nationalbank elaborates on this disappointment, 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 that could be pledged as collateral to Danmarks Nationalbank. Unlike the loan-bill scheme, the solvency 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 uncollateralized credit in the form of credit lines, the value of which depended on the applying institutions’ excess capital adequacy (Financial Stability 2009, 1st half, 20). As was the case in the loan-bills scheme, this was a seven-day loan.

Program Duration 1

Eligible Institutions 1

Interest Rate 1

If an institution chose to exercise the credit commitment, it had to pay an interest rate corresponding to Danmarks Nationalbank’s lending rate plus a premium. The interest rate was initially fixed as Danmarks Nationalbank’s usual lending rate plus two percentage points. On March 13, 2009, the interest was reduced to Danmarks Nationalbank’s usual lending rate plus one percentage point, a decision driven by a general downward trend in interest rates. On April 8, 2010, the interest rate was changed a third and final time to Danmarks Nationalbank’s usual lending rate plus two percentage points, to come into effect on October 1, 2010.

Participation Limit 1

Relief from Regulatory Capital and Liquidity Requirements 1

Some financial institutions used the excess-capital credit lines to help with their statutory liquidity requirements by increasing their excess liquidity cover. Figure 1 shows how the excess-capital facility contributed to increasing the institutions’ excess liquidity cover. The chart is based on liquidity reporting by the institutions to Danmarks Nationalbank and the Danish Financial Supervisory Authority. The chart illustrates the excess liquidity cover—with and without Danmarks Nationalbank’s temporary facilities—of banking institutions from Denmark’s groups 1-3 (with group 1 containing the largest banks and group 3 containing the smallest) (Financial Stability 2010, 65-66). The chart shows that 34 of the 35 institutions with credit lines under the solvency scheme improved their excess liquidity ratio by about 50 percentage points on average (middle bars).

Figure 1: Statutory Excess Liquidity Cover for Danish Banks in Groups 1, 2, and 3, with and without Danmarks Nationalbank’s Temporary Liquidity Facilities

Figure showing statutory excess capital cover for Danish Banks in Groups 1, 2, and 3, with and without Danmarks Nationalbank’s Temporary Liquidity Facilities

Source: Danish Financial 2009 (Financial Stability 2010, 67, Chart 36)

Figure 2: Danish Financial Supervisory Authority Banking Institutions in Groups 1 and 2

Text categorizing Danish Financial Supervisory Authority Banking Institutions into Groups 1 and 2 Source: Danish Financial 2009 (Financial Stability 2010, 14, Box 1)

The excess-capital facility, like Denmark’s other temporary credit facilities, was not widely used (Carstensen 2011, 108). The Danish government attributed this lack of temporary credit facilities usage to the success of the Original Guarantee Scheme under Bank Package I. Officials claim that because of the October 2008 government guarantee under the Bank Rescue Package I, “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, 1st half, 21). The 2009 report continues to note that this was part of a broader trend where securities eligible as part of the temporary expanded collateral base were not used. Although the temporary facilities (and corresponding expanded collateral policies) were supposed to help Danish institutions meet solvency requirements through alternative collateral, the use of these unconventional collateral types was limited. Of the total DKK332 billion in assets pledged as collateral to Danmarks Nationalbank by the end of April, usual eligible assets continued to account for the vast majority of the assets pledged as collateral for loans from Danmarks Nationalbank.

Some 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 were simply not as significant to supporting the banking industry as in the United States or United Kingdom (Woll 2014, 158).

Regardless, the International Monetary Fund has noted that compared to the first temporary liquidity facility—the loan-bills scheme—the excess-liquidity facility was a “more direct interventio[n]” (p. 12). In addition, the Financial Stability 2009, 1st half, report claims that the excess-capital schemes may have contributed to capping the borrowing rates (21).

Key Program Documents

Danmarks Nationalbank. Overview of temporary credit facilities initiatives at Danmarks Nationalbank.

Table of the various crisis-era lending operations of the Danmarks Nationalbank.

Danmarks Nationalbank. Financial Stability, 1st Half 2009

Danmarks Nationalbank financial stability document on the Danish economy in early 2009.
Danmarks Nationalbank. Financial Stability 2010

Danmarks Nationalbank financial stability document on the Danish economy in 2010

Excess Capital Temporary Credit Facility: Denmark Context

GDP

$355.62 billion in 2008

Source: Bloomberg

GDP per capita

$64,322 per capita in 2008

Source: Bloomberg

Sovereign credit rating (5-year senior debt)

As of Q4 2008:

Fitch: AAA

Moody’s: AAAu

S&P: AAAu

Source: Bloomberg

Size of banking system

$750.5 billion in total assets

Source: Bloomberg

Size of banking system as a percentage of GDP

211.04% in 2008

Source: Bloomberg

Size of banking system as a percentage of financial system

Data not available for given year

Source: World Bank Global Financial Development Database

5-bank concentration of banking system

89% of total banking assets in 2008

Source: World Bank Global Financial Development Database

Foreign involvement in banking system

18% of total banking assets in 2008

Source: World Bank Global Financial Development Database

Government ownership of banking system

1% of banks owned by the state in 2008

Source: Call et al. “Bank Ownership – Trends and Implications”

Existence of deposit insurance

100% insurance on deposits up to $133,333 in 2010

Source: World Bank Deposit Insurance Dataset, OECD

Taxonomy

Intervention Categories:

Market Support Programs

Countries and Regions:

Denmark

Crises:

Global Financial Crisis

Denmark Excess-Capital Temporary Credit Facility

Purpose

Key Terms

Abstract

At a Glance

Summary Evaluation

Key Design Decisions

Purpose of MLP 1

On September 26, 2008, Denmark introduced its second credit facility in response to the financial crisis based on institutions’ calculated excess capital

Program Duration 1

The excess-capital credit facility was extended twice before expiring.

Eligible Institutions 1

Banks and mortgage-credit institutes were eligible to participate.

Interest Rate 1

The interest rate for the excess-capital facility changed over time.

Participation Limit 1

For the excess-capital facility, the credit line was calculated as an institution’s excess capital adequacy less a margin of one percentage point.

Relief from Regulatory Capital and Liquidity Requirements 1

The Danish Financial Supervisory Authority stated that excess-capital credit lines may be included as an institution’s statutory liquidity until one month before the expiry of each respective facility.

Evaluation

References 6

Key Program Documents

Program Summaries 1

Reports/Assessments 2

Appendices

Taxonomy

Intervention Categories:

Countries and Regions:

Crises:

Notes