Search Close search

HjemYet another change to the insolvency ranking of own funds instruments

Yet another change to the insolvency ranking of own funds instruments

A new Section 13(5) to the Danish Recovery and Resolution Act, which will detail the ranking in insolvency of the different layers of own funds instruments of Danish credit institutions in the case of bankruptcy of the credit institution has been introduced before the Danish Parliament. Once passed by the Danish Parliament, Section 13(5) of the Danish Recovery and Resolution Act will enter into force on 1 January 2022.

Bill on statutory ranking of own funds instruments – new Section 13(5) of the Danish Recovery and Resolution Act

On 6 October 2021, Bill no. 12 on Changes to the Danish Financial Business Act, the Danish Capital Markets Act, the Danish Investment Association etc. Act and Certain Other Acts (the “Section 13(5) Bill”) was introduced before the Danish Parliament. The Section 13(5) Bill contains a new Section 13(5) to the Danish Recovery and Resolution Act, which will enter into force on 1 January 2022.

The new Section 13(5) reads as follows (our translation): “In insolvency of an institution, Common Equity Tier 1 capital instruments are paid after Additional Tier 1 capital instruments and Additional Tier 1 capital instruments are paid after Tier 2 capital instruments. A capital instrument that is only partly recognised as an own funds item shall in its entirety be paid as if it was own funds in accordance with the first sentence.

The proposed new Section 13(5) of the Danish Recovery and Resolution Act will detail the ranking in insolvency of the different layers of own funds instruments (i.e. Common Equity Tier 1 (CET1) capital instruments, Additional Tier 1 (AT1) capital instruments and Tier 2 capital instruments) of Danish credit institutions in the case of bankruptcy of the credit institution. According to the preparatory works to the Section 13(5) Bill, the ranking as provided for in the new Section 13(5) of the Danish Recovery and Resolution Act will apply irrespective of the contractual ranking of the capital instruments. The ranking set out in the new Section 13(5) of the Danish Recovery and Resolution Act will apply to all own funds instruments of the credit institution which, at the relevant point in time (i.e. the bankruptcy of the credit institution), meet the relevant eligibility criteria for qualifying as CET1, AT1 or Tier 2 capital instruments. The reasoning behind the introduction of the new Section 13(5) is, according to the preparatory works to the Section 13(5) Bill, to cater for and cure the so-called infection risk that may arise in some credit institutions as a result of the expiry of CRR’s own funds grandfathering provisions discussed in detail in the European Banking Authority (“EBA”) opinion on the prudential treatment of legacy instruments published on 21 October 2020.

The Section 13(5) Bill does not entail any changes to Section 13(4) of the Danish Recovery and Resolution Act, which implements Article 48(7) of the BRRD and which entered into force on 28 December 2020. According to Section 13(4) of the Danish Recovery and Resolution Act liabilities resulting from fully or partially recognised own funds instruments shall rank junior to all other claims in the case of bankruptcy of the credit institution.

The Section 13(5) Bill is now subject to three readings in the Danish Parliament before the Bill can be passed into law. Currently, there has not been set a date for the second and third reading of the Section 13(5) Bill.

Upon the Section 13(5) Bill being passed by the Danish Parliament (which we expect to occur during the fall of 2021) Danish credit institutions should consider whether and how to reflect Section 13(5) of the Danish Recovery and Resolution Act in the status provisions of own funds instruments (i.e. AT1 and Tier 2 capital instruments) to be issued after the Section 13(5) Bill has been passed. For credit institutions with an EMTN-programme in place it should also be considered whether the new Section 13(5) of the Danish Recovery and Resolution Act, once passed, would require any updates to the status provisions and related risk factors for AT1 and Tier 2 capital instruments, which can be issued under the EMTN-programme. Gorrissen Federspiel will be happy so assist in relation to any such considerations.

Sign up for our newsletter

Sign up for Gorrissen Federspiel’s news updates and receive the latest legal news and event invitations directly in your inbox.

Thank you for signing up

You have already signed up