Denmark Loan Bills Temporary Credit Facility

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. Confidence among the institutions was still relatively high. However, financial institutions had become more reluctant to lend to each other. Observing this phenomenon, Denmark’s central bank—Danmarks Nationalbank—chose to approve a new type of security, the loan bill, as eligible collateral for loans at the central bank.

This marked the first time Danmarks Nationalbank’s framework for credit operations was adjusted in response to the Global Financial Crisis; however, it would be followed by more changes in the next few months. During the interbank market freeze of September 2008, Danmarks Nationalbank used additional monetary policy instruments to increase market liquidity. These included adding a second temporary credit facility (the excess-capital temporary credit facility, also known as the solvency scheme) and an expansion of the collateral base to include more securities than were normally eligible as collateral for loans from Danmarks Nationalbank.^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 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). By the end of October 2008, the government would guarantee all bank liabilities, including borrowing in the interbank market

The objective of the loan bills scheme was to facilitate lending among institutions. Every Friday, loan bills could be pledged as collateral for a seven-day loan from Danmarks Nationalbank. One banking institution could borrow from another institution by issuing a loan bill, and the institution buying the bill could raise liquidity by using it as collateral for a loan from Danmarks Nationalbank. The buying institution could also count the loan bill toward its statutory liquidity, as required by section 152 of the Danish Financial Business Act.

The introduction of loan bills was followed by the temporary expansion of the accepted collateral base for loans from Danmarks Nationalbank to banking institutions and mortgage-credit institutes. The loan bills had to meet Danmarks Nationalbank’s standard terms. These included requiring that loan bills were zero-coupon securities issued by banking institutions in the Kingdom of Denmark. In addition, the maximum maturity for loan bills was set at one year. The loan bills also had to be issued with VP Securities, Denmark’s central securities depository, as the account controller. The collateral value was calculated as the nominal value of the bills minus a haircut of 10 percent.

Initially, the interest rate for lending against loan bills was fixed as Danmarks Nationalbank’s usual lending rate plus one percentage point. On October 7, 2008, the interest rate for loan bills at Danmarks Nationalbank was changed to Danmarks Nationalbank’s usual lending rate plus two percentage points. The purpose of this adjustment was to align the terms and conditions with the other temporary credit facilities. On March 13, 2009, the interest rate was reduced to Danmarks Nationalbank’s usual lending rate plus one percentage point, a decision influenced by a downward trend in interest rates overall. On July 17, 2009, loan bills were included in the temporary collateral basis, and the interest rate was abolished. The purpose was to align the terms and conditions for pledging of unquoted unsecured debt with government guarantees and loan bills.

The loan bills credit facility was initially set to expire on May 21, 2009. On November 11, 2008, the credit facility for loan bills was extended until September 30, 2010. The purpose of this adjustment was to align the expiry dates of the temporary credit facilities. In April 2010, the temporary expansion of collateral basis (including loan bills) was extended to February 26, 2011. On February 26, 2011, the credit facility for loan bills expired.

Loan bills were not widely issued. A 2009 Financial Stability report showed low issuance in the facilities’ initial year of operation. Between DKK25 and DKK30 billion in loan bills were issued overall; issuance peaked in October 2008, when about DKK16 billion were issued. (See Figure 1) At the end of April 2009, Danish banking institutions had issued a total of DKK6 billion in loan bills to other institutions (21).

Also by April 2009, no institutions had borrowed against loan bills from the central bank. The 2009 report notes 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 liquidity requirements through alternative collateral, the use of these unconventional collateral types was limited. Usual eligible assets continued to account for the vast majority of the DKK332 billion in assets pledged as collateral for loans from Danmarks Nationalbank.

Figure 1: Comparison of securities by issuance types (loan bills in bright orange).

Source: Financial Stability 2010, p. 65

The Danish government attributed this relative lack of temporary-credit-facilities usage to the success of the Original Guarantee Scheme under Bank Package I. As a result of Bank Rescue Package I, which guaranteed interbank loans, 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, 1st Half, 21).

After the temporary expansion of collateral (including loan bills) 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 new temporary expansion of collateral expired on July 1, 2014.