The Danish Government today concluded an agreement on a credit package with the Danish People’s Party, the Social Democrats, the Socialist People’s Party, the Social Liberals and Liberal Alliance.
The credit package is intended to avoid that businesses and citizens get caught in a credit squeeze, where they cannot obtain loans from banks and mortgage credit institutions (MCIs) for viable projects.
· Government injection of tier 1 hybrid capital into banks and mortgage credit institutions: Under the agreement, the Danish State will offer banks and MCIs state-funded capital injections. The Danish State will offer sufficient capital to create room for banks and MCIs to continue to lend money to businesses and citizens for financially sound projects. It will be a requirement that all participating financial institution after the capital injection should have a 12 per cent in tier 1 capital as a minimum. Institutions that prior to the capital injection had a tier 1 capital on 9 per cent or above will as a maximum be offered an increase in tier 1 capital on 3 per cent, and the injection in institutions with a tier 1 capital below 9 per cent will amount to the difference between 12 and their actual tier 1 capital.
· Pricing: Depending on the individual bank’s rating, capital adequacy and liquidity risk, the fixed interest rate can vary between 9% and 11¼%. It is expected that the average interest rate will be approximately 10%.
· All solvent banks may apply: All credit institutions in Denmark that comply with the statutory solvency requirements may apply for state-funded capital injections until 30 June 2009.
· Conditions on lending: The agreement between the Danish State and the individual banks will contain a provision that the capital is granted with the objective of creating room in the bank’s lending policies to counteract a credit squeeze. The individual banks undertake to submit semi-annual reports on lending developments and on the bank’s lending policies. These reports will be made public.
· Dividend policy: In the Act on Financial Stability, the payment of dividends is prohibited until 30 September 2010. After September 2010, institutions can pay out dividends subject to the condition that it is covered fully by the annual net profit as long as there is state capital injection.
· Exit: The state-funded capital injections are intended to be temporary. Banks and MCIs may redeem the loans after a period of three years, and there will be financial incentives to do so.
· Guarantee scheme to be prolonged: Banks and MCIs shall have the same opportunities to issue medium-term loans during the period until 2013 as their foreign competitors. In order to strengthen the banks’ access to private capital and, by extension, to create room for lending, a three-year transition scheme will be introduced with respect to the government guarantee in the Agreement on Financial Stability (the bank package), ensuring a gradual phase-out of the existing government guarantee, expiring on 30 September 2010. With effect from 1 October 2010, ordinary deposits will be covered by an increased deposit guarantee scheme of DKK 750,000.
· Underwriting: It will be possible for the institutions to apply for the Danish State to underwrite the issue of a private capital emission.
· Increased control of remuneration in the financial sector: The Danish State will make capital available on the condition that the financial sector complies with a number of requirements regarding executive pay.
· The Danish FSA will be strengthened: The Danish FSA will receive an additional DKK 15 million with a view to enhancing the supervision of banks and MCIs. In the future, the Danish FSA must at least once annually review the solvency requirements of all credit institutions, except for the smallest ones.
· Maximum capital injection: If all institutions fully exploit the offer concerning state-funded capital resources, the Danish State will inject approximately DKK 100 billion (5,5 pct. og GDP) by way of new tier 1 capital, about DKK 75 billion of which will be provided to banks, while the remaining amount of about DKK 25 billion will be provided to MCIs.
· No effect on fiscal policy sustainability: The capital injections are basically loans that carry interest. The parties to the agreement emphasise that the Danish State should achieve a return equal to the risk the Danish State assumes by making the capital available. Therefore, the state-funded capital injections are not expected to affect fiscal policy sustainability.
· Fast-track legislative process: Late next week, Minister for Economic and Business Affairs Lene Espersen will propose a bill implementing the agreement. The plan is for the bill to be fast-tracked through the Danish Parliament in order for the new act to be in place at the beginning of February 2009.
Minister for Economic and Business Affairs Lene Espersen and Finance Minister Lars Løkke Rasmussen state:
“The Government is very pleased that we were able to conclude a broad political agreement today which will contribute to providing access for the businesses and citizens of Denmark to obtain funding for financially sound projects. We have every reason to pay tribute to the parties of the Danish Parliament for acting responsibly.
We are facing extraordinary financial conditions worldwide, and most people will probably agree with us that it would have been better had we not been forced to take the steps taken today. But the parties behind the credit package are in complete agreement that action is required.
Failing to take action would put even financially sound businesses at risk of not being able to borrow sufficient funds to ensure operations, jobs and growth. It is this negative spiral that a broad majority of the Danish Parliament has agreed to end.
Borrowing money from the Danish State will by no means be without cost to the credit institutions. Under the agreement, the Danish State will make capital available to banks and mortgage credit institutions. The Danish State will receive a return corresponding to the risk it assumes by making capital available.”