Denmark: Roskilde Bank Emergency Liquidity Program, 2008

Roskilde had considerable exposure to real estate and construction firms in July 2008 (Moody’s 2008). Rating agencies downgraded Roskilde when the bank’s management discovered that Roskilde would have to take larger write-downs than expected (AFP 2008; DNB 2009b; EC 2008a; NAO 2009; Dow Jones 2008a). Later reports reveal that Roskilde’s management initially told Danish authorities that the bank was solvent, but they feared a bank run and thus sought assistance from DNB (Bernstein 2008; DNB 2009b; Dow Jones 2008a; EC 2008a). DNB and PCA agreed to grant an unlimited credit facility, conditioned on Roskilde’s full or partial sale to simultaneously avoid speculation about suspension of payments, and avoid setting the precedent of a governmental safety net for other distressed banks (AFP 2008; DNB 2009b; EC 2008a; NAO 2009). On July 10, 2008, Roskilde put itself up for sale (Dow Jones 2008a; Reuters 2008).

On August 22, 2008, external auditors told the DFSA that Roskilde did not comply with the individually calculated capital need or the statutory solvency requirement. The DFSA granted Roskilde regulatory relief until August 29, 2008, to meet its individual capital need and statutory solvency requirement; the DFSA subsequently extended this relief to September 16, 2008 (DNB 2008c).

Then-DNB Governor Nils Bernstein spoke about Roskilde at a press conference on August 27, 2008:

Roskilde could only use the credit facility to cover liquidity that was necessary for the bank’s day-to-day activities. Roskilde could not use the facility to invest in new activities, take on risky positions in commercial markets, engage in new, more extensive credit facilities, or actively market and attract new depositors or borrowers (EC 2008a).

When DNB created a new bridge bank (New Roskilde) on August 24, 2008, DNB said that it used the credit facility to repay all senior liabilities of New Roskilde. Danish authorities said there was a legal obligation to pay these creditors for two reasons. First, the creditors’ contracts had reached maturity, and the creditors did not want to extend their contracts. Second, the transfer of assets and liabilities from Old Roskilde to New Roskilde constituted an event of default, and the remaining creditors thus had the right to terminate their contracts and demand repayment. All creditors chose redemption rather than transfer to New Roskilde^FNAccording to Roskilde’s annual report, the bank had DKK 2.1 billion in deposits as of December 2008 (Roskilde Bank 2009). (EC 2008b).

Broad-Based Deposit Guarantee

Effective October 10, 2008, Minister for Economic Affairs Lene Espersen announced a two-year General Guarantee Scheme for all bank deposits,^FNThe General Guarantee Scheme supplemented an existing, privately funded deposit insurance system administered by DNB, which covered deposits of all PCA members up to EUR 50,000 (DGFDI 2009; PCA 2011). For more on Denmark’s General Guarantee Scheme, see Hoffner (2022). excluding deposits at Roskilde (FSC 2011a; FSC 2011b; Levring 2008). However, an agreement between the FSC and the PCA signed on August 10, 2009, provided DKK 10.5 billion from the General Guarantee Scheme to cover accounts at Roskilde (FSC 2010a; FSC 2011a).

Capital Injections

Following the acquisition of Roskilde on October 6, 2008, DNB and PCA made a capital injection of DKK 4.5 billion into Roskilde to meet solvency requirements (EC 2008b; IMF 2014). DNB injected DKK 1.7 billion in the form of class A shares and DKK 2.0 billion in the form of subordinated debt that counted as capital; PCA injected DKK 750 million in the form of class B shares. The class B shares ensured that Roskilde’s incurred losses would first be covered by the PCA before DNB (EC 2008b; EC 2011).

Resolution

On August 24, 2008, DNB announced that it and the PCA acquired Roskilde to avoid liquidation, as Roskilde had not received any private offers (see (Decker 2024)) (DNB 2008b; DNB 2009b; McLaughlin and Levring 2008).

In December 2013, the FSC settled with the Consumer Ombudsman on the sale of bank shares by Old Roskilde. The settlement concerned private customers who bought shares in connection with two share sales campaigns: one from August 11, 2006, to September 17, 2006, and another from March 12, 2007, to April 8, 2007. The FSC identified 17,000 private customers that were entitled to damages. The FSC offered these customers compensation equivalent to 60% of their net loss (Danish Consumer Ombudsman 2013; FSC 2014). According to the Consumer Ombudsman, the compensation took into account the general risks involved in buying Roskilde’s shares and the additional risk compared to other banks’ shares. If shareholders did not want to accept this offer, the settlement said that the limitation period was suspended for 24 weeks after the settlement’s conclusion. Thus, shareholders had the opportunity to submit a complaint to the FSC or the Bank Appeals Board, or shareholders could file a court case. The settlement exempted Roskilde’s senior employees, customer advisors, and others with special knowledge of the bank’s conditions or special knowledge of the risk of buying shares (Danish Consumer Ombudsman 2013).

Danish Legal Authority

DNB could grant advances against security, according to Section 22 of the central bank bylaws (Danish Parliament 1936). Additionally, according to Section 4 of DNB’s bylaws, the DNB board of directors decided “all matters of special importance which may be considered to be outside the domain of daily business” (Danish Parliament 1936, 117). While no primary source documentation refers to the DNB articles of association as the legal basis of the emergency liquidity in question, the author notes Sections 4 and 22 as likely sources of legal authority.

The Treasury needed approval from the Finance Committee of the Danish Parliament to guarantee losses beyond the PCA’s commitment. The minister for economic and business affairs proposed legislation on July 13, 2008, which was revised on July 18, 2008 (EC 2008a). On September 4, 2008, the Finance Committee passed Appropriation 199 4/9 2008 concerning the state guarantee for any loss suffered by DNB for the unlimited credit facility. The Finance Committee passed an additional appropriation, Appropriation 25 27/11 2008, on November 4, 2008, concerning DNB’s part in the unlimited credit facility (NAO 2009).

As a member of the EU, Denmark must comply with the prohibition on monetary financing contained in Article 123(1) of the Treaty on the Functioning of the European Union (TFEU)^FNThe TFEU, itself based on the Treaty of Maastricht of 1992, is one of the EU’s two foundational treaties (the other being the Treaty on European Union). It sets out in detail the principles and objectives of the EU and the scope and functional responsibilities of EU institutions (the Treaty on European Union in contrast defines the EU’s purpose and lays out its institutions and form). As a technicality, before the Lisbon Treaty came into effect in 2009, TFEU Article 123 was Article 101 of the Treaty Establishing the European Community, but the content was unchanged when the Lisbon Treaty relocated the article., which reads (emphasis added):

TFEU Article 123 prohibits the extension of liquidity to insolvent firms (at least without a state guarantee), as such is considered a public undertaking (in other words, one that should be supported with state resources). The monetary financing prohibition—including its application to emergency liquidity—is EU-level law, and thus applies even to those nations that are Member States of the EU but not members of the Eurosystem. For more on the application of the monetary financing prohibition to ELA, see (Arnold 2025).

EC Decision-Making

On July 31, 2008, the European Commission (EC) ruled that the part of the unlimited credit facility guaranteed by the PCA did not constitute State Aid, while the part of the unlimited credit facility guaranteed by DNB did constitute State Aid under the application of Article 87(3)(c) of the EC Treaty and the Community guidelines on State Aid for rescuing and restructuring firms in difficulty. On compatibility, the EC said that Roskilde met the five conditions of the community guidelines. First, the assistance mostly took the form of loans and loan guarantees. Furthermore, the interest rate was higher than Denmark’s reference rate and the duration of the facility could be terminated at any time by DNB. Second, the aid was for the purpose of preventing serious negative social and economic consequences of a run on Roskilde which could have led to contagion. The EC also said that this aid would not have undue adverse effects on other member states. Third, Danish authorities committed to providing the following within six months: (a) restructuring plan, or (b) liquidation plan, or (c) proof that the facility was repaid in full, or (d) proof that the guarantee was terminated. Fourth, the facility would allow Roskilde only the minimum amount necessary of liquidity, verified by an independent auditor; Roskilde was not in a position to act aggressively in the market. Fifth, this was the first instance of Roskilde receiving rescue or restructuring aid (EC 2008a).

On August 24, 2008, Danish authorities said that they were not aware of the European Central Bank’s strict interpretation of monetary financing rules for insolvent banks, since DNB’s risk was covered by the state’s unlimited guarantee (NAO 2009).

In its subsequent decision in November 2008 on Roskilde’s resolution, the EC said that it had observed a “substantial change in circumstances” and needed to reevaluate the ad hoc liquidity facility (EC 2008b, 13). The EC noted that the unlimited credit facility originally granted to Roskilde on July 10, 2008, was transferred to New Roskilde on October 6, 2008, per the resolution plan.^FNSince the transfer, New Roskilde had made further drawdowns on the facility, and Danish authorities indicated to the EC that even more drawdowns were forthcoming in order to pay senior creditors who had demanded immediate reimbursement (see Key Design Decision No. 7, Source and Size of Funding) (EC 2008b). The EC concluded that the unlimited credit facility, as part of a package granted to Roskilde (also including recapitalization, restructuring, and resolution measures), constituted liquidation aid rather than restructuring aid. Therefore, the question was whether this liquidation aid was compatible with the common market. The EC ultimately decided that the unlimited credit facility constituted State Aid compatible with Article 87(3)(b) of the EC Treaty (EC 2008b). The package of aid to Roskilde was “necessary to remedy a serious disturbance of [the] Danish economy in the current market situation [by allowing] the continuation of the senior debt funding among financial institutions” (EC 2008b, 19). In its justification, the EC noted that “a private sector solution was first tried without success before committing any additional state resources” (EC 2008b, 20).

Roskilde’s board said it feared a bank run and thus sought assistance from DNB on July 10, 2008 (AFP 2008; DNB 2009b; EC 2008a; Roskilde Bank 2008). DNB consulted the ministry of economic and business affairs, DFSA, and DBA before granting emergency liquidity assistance, while Roskilde was readying itself for sale (AFP 2008; DNB 2009b; ENP 2008; EC 2008c; NAO 2009). Danish officials later said that they chose DNB as the administrator of the unlimited credit facility, because it was the central bank’s job to support temporarily illiquid but solvent banks (NAO 2009).

DNB administered the liquidity facility (EC 2008a). DNB was also responsible for Roskilde’s administration and related costs after the government took over the distressed institution on August 24, 2008; the PCA itself could not take over a distressed bank, according to its own articles of association (NAO 2009; PCA 2011). DNB received weekly summaries of its account with Roskilde. DNB regularly notified the minister for economic and business affairs and the Finance Committee of the Danish Parliament about losses absorbed by the government (NAO 2009).

The PCA’s initial guarantee of DKK 750 million was an indemnity bond. The PCA would make its payment under the guarantee as soon as Roskilde failed to repay the loan to DNB, regardless of whether Roskilde underwent insolvency proceedings (EC 2008a). Though it was possible to double the PCA’s contribution to DKK 1.5 billion according to the consortium’s bylaws, the government did not pursue this option because it could not obtain approval from all PCA members in the necessary timeframe (NAO 2009).

The Danish government and DNB chose PricewaterhouseCoopers (PwC) to verify and approve the cashflow budget required for drawdowns of the credit facility (EC 2008a).

The PCA was funded by voluntary contributions from member banks and from the Danish firm Nykredit (DNB 2008b; NAO 2009; PCA 2011). Member banks contributed a maximum annual contribution of up to DKK 750 million per year, unless otherwise unanimously decided by the board of representatives^FNFor perspective, the size of Denmark’s gross domestic product was USD 353.4 billion in 2008 (per the World Bank). (EC 2008a; PCA 2011). The PCA guaranteed a maximum of DKK 1.5 billion per calendar year; the board of representatives could change this amount with a unanimous vote (EC 2008a; NAO 2009; PCA 2011).

The FSC took over New Roskilde and its credit facility from DNB in August 2009 (FSC 2010a; FSC 2011b). In its annual report for 2010, the FSC indicated that New Roskilde could still draw on the transferred facility at that time (see Key Design Decision No. 7, Source and Size of Funding) (FSC 2011b).

The FSC reported outstanding loans of DKK 4.4 billion to New Roskilde Bank at the end of 2010, including the legacy DKK 1 billion subordinated debt and DKK 3.4 billion from “ordinary debt financing,” presumably representing debt under the loan facility (FSC 2011b, 29; FSC 2012). Even after New Roskilde’s assets and liabilities were subsumed by FS Finans and FS Bank in June 2011, the FSC reported outstanding loans of DKK 1.9 billion to “FS Finans A/S, Roskilde,” presumably still including the subordinated loan and the legacy credit facility (FSC 2011b; FSC 2012).

PwC verified and approved the cashflow budget for drawdowns of the unlimited credit facility. PwC particularly scrutinized whether the budgeted needs complied with the behavioral conditions attached to the credit facility (for example, no investments in new activities) (EC 2008a).

DNB’s board of directors decided on important questions outside of normal, daily central bank operations. As a decision-making body, the DNB board of directors comprised 25 members: eight members elected from parliament, one of whom resigns their seat in parliament; one economist; one lawyer; and 15 members “with a thorough knowledge of the economy” who were elected by other members of the DNB board of directors (Danish Parliament 1936, 116). The board internally elected a chair and deputy chair for one-year terms. The board made decisions by majority vote, and the chair was the deciding vote in the event of a tie (Danish Parliament 1936).

On July 10, 2008, DNB issued a press release stating that it would “provide the necessary liquidity to Roskilde Bank A/S. The Government and the financial sector have assured [DNB] of their support to the arrangement with a guarantee towards [DNB]” (DNB 2008a). The press release also said that the “amount and scope of [Roskilde’s] write-downs are not known at this point but will be made public once the full amount is known” (DNB 2008a).

On June 17, 2009, the DFSA released its own report on the causes of Roskilde’s collapse. The DFSA also self-assessed its response. Usually, such reports could not be made public by the DFSA or minister for economy and business, according to Section 354 of the Financial Business Act (DFSA 2009; Danish Parliament 2008a, sec. 354). However, according to the Financial Business Act, Section 352(a)1–2, the DFSA must prepare a public report in the following circumstances: (a) a financial institution receives state funding or guarantees, or (b) a financial institution has been declared bankrupt. Thus, the DFSA was allowed to publicize its findings because DNB had provided a liquidity facility to Roskilde, guaranteed by the government, and Roskilde had been declared bankrupt (DFSA 2009).

The Danish government said it was DNB’s responsibility to cultivate support for the guarantee with the parliament’s Finance Committee. On September 4, 2008, the Finance Committee approved Appropriation 199 4/9 2008 for the state’s guarantee on any losses incurred by DNB’s unlimited credit facility to Roskilde. The Finance Committee later approved Appropriation 25 27/112008, which expanded the government’s guarantee to include any losses incurred in the takeover and resolution of Roskilde (NAO 2009). (See Decker [2024] for more information on Roskilde’s restructuring and resolution.)

On July 18, 2008, the minister for economic and business affairs told the Finance Committee of the Danish Parliament that he did not expect drawdowns on the unlimited credit facility to exceed DKK 15–20 billion. However, after Lehman Brothers failed and led to market stress across the world in addition to the announcement of the government takeover, the EC reported that Roskilde drew down DKK 36.8 billion on the facility by early October on a short-term basis to allow the bank to pay depositors and other senior creditors by the end of that month (see Key Design Decision No. 1, Purpose). Danish authorities said that Roskilde’s creditors were legally allowed to demand immediate repayment for two reasons: (a) their contracts had matured, and these creditors did not want to extend their contracts, and (b) the impending transfer of Roskilde’s assets and liabilities to a new legal entity constituted an event of default (EC 2008b). New Roskilde continued to draw on emergency liquidity assistance until the FSC merged New Roskilde’s assets into a liquidation vehicle in 2011 (FSC 2011b; FSC 2012).

Research did not uncover the Danish state’s total losses on the credit facility. According to an EC document in November 2008:

At the end of 2010, the Danish state’s outstanding loss on the restructuring of Roskilde stood at DKK 8.9 billion, although it is possible the FSC may have recovered a portion of that through interest and commissions earned and any later gains on asset sales. Since DKK 8.7 billion of the state’s DKK 12.4 billion total investment in New Roskilde came from the conversion of emergency liquidity support to equity, the majority of that loss for the Danish state came from the credit facility (DNB 2009b; FSC 2010b; FSC 2011b).

It is unclear whether the state’s remaining loans to the bank were fully repaid or whether FSC has remaining legacy assets from Roskilde. The FSC reported positive earnings throughout the 2010s based on interest and commission income from member banks (MIBFA n.d.).

Figure 3 shows the usage of the liquidity facility through December 2010.

The credit facility’s rate was 200 basis points (bps) above DNB’s ordinary rate for loans and 100 bps above the rate for DNB’s standing facility for seven-day liquidity assistance. As of July 31, 2008, DNB’s ordinary rate for loans was 4.6% and the standing facility’s rate was 5.6%, meaning that the rate for Roskilde’s unlimited credit facility was 6.6% (EC 2008a).

Neither the PCA nor the state charged fees for their guarantees of the credit facility (EC 2008a).

DNB could terminate the credit facility at any time without notice. While the loan agreement did not have a termination date, DNB committed to finding a solution for Roskilde within six months. By January 11, 2009, DNB had to provide a restructuring plan, liquidation plan, or proof that the credit facility was completely repaid with termination of the state guarantee (EC 2008a).

On August 24, 2008, since the bank did not receive any offers after putting itself up for sale, DNB and the PCA acquired Roskilde to avoid liquidation (Decker 2024; DNB 2009b; McLaughlin and Levring 2008). Danish authorities chose to create New Roskilde because taking assets and liabilities from Old Roskilde directly would have entailed expropriation and a complicated legal process that Danish authorities did not deem appropriate (EC 2008b). The PCA would convert its guarantee into an equity stake of DKK 750 million (DNB 2008b; EC 2008a; EC 2011). According to DNB’s third quarter report for 2008, restructuring and capital injections from DNB and PCA would best allow Roskilde to settle its activities (DNB 2008c).

The FSC reported outstanding loans of DKK 4.4 billion to New Roskilde at the end of 2010, including the legacy DKK 1 billion subordinated debt and DKK 3.4 billion from “ordinary debt financing,” presumably representing debt under the loan facility (FSC 2011b; FSC 2012). Even after New Roskilde’s assets and liabilities were subsumed by FS Finans and FS Bank in June 2011, the FSC reported outstanding loans of DKK 1.9 billion to “FS Finans A/S, Roskilde,” presumably still including the subordinated loan and the legacy credit facility (FSC 2011b; FSC 2012).

Roskilde was unable to provide sufficient collateral, with the liquidity facility secured by the PCA’s guarantee of DKK 750 million and the state’s guarantee beyond that initial amount; this meant that DNB was to be protected from losses on the facility (see Key Design Decision No. 1, Purpose) (DNB 2009b; EC 2008a). Initially, Danish authorities anticipated drawdowns on the facility between DKK 15 billion–DKK 20 billion. The state’s guarantee would only be triggered after Roskilde’s equity and subordinated capital and the PCA’s guarantee were exhausted (EC 2008a).

Private sector support from the PCA reflected negotiations among DNB, PCA, and the ministry of economic and business affairs. While no calculations were performed for private sector support, the PCA’s contribution could not exceed the government’s estimated loss if Roskilde were to enter bankruptcy, following the PCA’s articles of association (NAO 2009; PCA 2011). The PCA wrote off its DKK 750 million investment in Roskilde after the government’s acquisition (FSC 2010a).

It became apparent that Roskilde had to make further write-downs that would prevent the bank from meeting the calculated capital adequacy need and capital requirement of the Financial Services Act.^FNAn institution’s base capital had to amount to a minimum of 8% of the institution’s risk-weighted assets or capital adequacy need (NAO 2009). On August 29, 2008, the chairman of the Finance Committee received a letter from the ministry of economic and business affairs about additional appropriations needed. The ministry thought that Appropriation 199 could not be adjusted, because the EC had already approved the measures necessary for the emergency liquidity assistance, and these measures had already been taken. Thus, the Finance Committee had to pass additional appropriations. On November 4, 2011, the Finance Committee passed Appropriation 25 27/11 2008 to extend the government’s guarantee to include any losses incurred in connection with DNB’s takeover and resolution of Roskilde (NAO 2009).

Research did not uncover any impacts from the unlimited credit facility on monetary policy transmission in Denmark.

The unlimited credit facility was conditioned on Roskilde’s full or partial sale (DNB 2008a; DNB 2009b).