Denmark Excess-Capital Temporary Credit Facility

During the interbank market freeze of September 2008, Denmark’s central bank, Danmarks Nationalbank, used a series of unconventional monetary policy instruments to increase market liquidity. As part of these measures, the central bank created two temporary credit facilities: first the loan-bills facility and later the excess-capital facility, also known as the solvency scheme. In addition, it expanded the collateral base for loans from Danmarks Nationalbank to include more securities than were normally eligible as collateral.^FNDuring the financial crisis, the collateral base for loans from Danmarks Nationalbank to financial institutions was temporarily expanded to include special loan bills, quoted and unquoted shares, investment fund shares, bank bonds with government guarantee, as well as special purpose vehicle (SPV) bonds issued on the basis of government-guaranteed loans to the institutions (Financial Stability 2010, 66).These steps were taken to “prevent solvent banks from experiencing difficulties due to insufficient liquidity” (Financial Stability 2009, 1st half, 18).

The loan-bills temporary credit facility was first implemented in May 2008, before the Global Financial Crisis and the interbank market freeze had truly hit Denmark. By contrast, 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). The credit line could be counted toward the institution’s statutory liquidity requirement (Financial Stability 2010, 66).

On September 26, 2008, Denmark introduced its second temporary credit facility in response to the Global Financial Crisis: the excess-capital facility. This facility provided credit to banks and mortgage-credit institutes on the basis of their excess capital adequacy, calculated as the difference between their base capital and their capital need. Financial institutions had to apply for a credit line; successful applications were then granted credit lines by the Board of Governors of Danmarks Nationalbank. The credit line was calculated as an institution's excess capital adequacy less a margin of one percentage point, usually up to a maximum of DKK800 million. On Fridays, banks and mortgage-credit institutes could receive seven-day loans at Danmarks Nationalbank within the credit line.

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, a change that came into effect on October 1, 2010.

The Danish Financial Supervisory Authority stated that access to excess-capital credit lines could be included as part of an institution’s statutory liquidity, cf. Section 152 of the Danish Financial Business Act, until one month before the expiry of the facility. The expiration date subsequently changed twice. When it was introduced in September 2008, the excess-capital credit facility was initially set to expire on January 30, 2009. On October 7, 2008, it was extended to September 30, 2010. On April 8, 2010, the facility was further extended until February 26, 2011. On February 26, 2011, the credit facility on the basis of excess capital adequacy expired.

Usage of the scheme remained low throughout its existence. In 2009, Denmark reported that “new temporary credit facilities” had “led to a significant relaxation of Danmarks Nationalbank’s extension of credit to banks and mortgage-credit institutes compared to the framework for credit operations that applied prior to the onset of the crisis” (Financial Stability 2009, 1st half). The central bank had established DKK14 billion in credit lines based on the solvency scheme by the end of April 2009, distributed across 35 banking institutions (Danmarks Nationalbank 2009, 1st half, 21). Credit lines totaled DKK12.4 billion at the end of April 2010 (Danmarks Nationalbank 2010, 65). Credit lines were drawn on for loans only a few times; the exact number of times has not yet been identified. But the central bank emphasized that the point of the program was to reassure markets about the liquidity of banking institutions. The excess-capital scheme helped 35 institutions meet the liquidity requirements under Section 152 of the Danish Financial Business Act.

After the first wave of temporary credit facilities and expansion of collateral expired in February 2011, a partial reintroduction of the temporary collateral expansion was put into place on August 10, 2011. It allowed banks and mortgage-credit institutes to pledge certain shares in jointly owned corporations as collateral with Danmarks Nationalbank. This policy expired on July 1, 2014.