Roskilde Bank

In the course of the normal review of loans and guarantees in connection with the preparation of the interim report for the 1st half of 2008, the board and management of Roskilde Bank found it necessary to make far more extensive write-downs than previously assumed.¹ In the assessment of the board, an announcement that substantially greater write-downs were expected might lead to a run on the bank. Consequently, the Danish Financial Supervisory Authority and Danmarks Nationalbank were con tacted, and on 10 July 2008 Danmarks Nationalbank concluded an agree ment with Roskilde Bank to provide the necessary liquidity. Under the agreement, Danmarks Nationalbank was to make an unlimited credit fa cility available to Roskilde Bank. A precondition was that Roskilde Bank complied with the solvency requirements of the Danish Financial Business Act. According to the Danish Financial Supervisory Authority, there was no evidence that Roskilde Bank did not meet the statutory solvency re quirements.

The guarantee was aimed at ensuring funding for the continued oper ation of the bank and was subject to a number of conditions, including that Roskilde Bank should work towards a full or partial sale of the bank.

Against this background, from 15 July 2008 to the deadline on 22 August, Danske Markets was in charge of a sales process during which a number of interested banks scrutinised Roskilde Bank and its exposures very closely.

At the expiry of the deadline the unfortunate outcome was that no banks would submit an offer for either all or parts of Roskilde Bank. According to Danske Markets, one explanation was that the potential buyers had discovered that the quality of the bank's credit exposures was subject to great uncertainty. As a result, no one ventured to give an estimate of the value of Roskilde Bank's assets. On 22 August 2008, Roskilde Bank notified Danmarks Nationalbank of the outcome of the sales process.

At the same time, in connection with preparation of the interim re port, Roskilde Bank's external auditors discovered write-downs of at least kr. 1 billion more than the amount notified to Danmarks National bank on 10 July. The interim report was audited at the order of the Danish Financial Supervisory Authority. Also on 22 August, the external auditors notified the Danish Financial Supervisory Authority that the bank no longer complied with the individually calculated capital need nor the statutory solvency requirement.

The Danish Financial Supervisory Authority gave Roskilde Bank respite until 29 August 2008, and subsequently until 16 September 2008, to once again meet the solvency requirement, as well as its individual cap ital need.

Against that background, Danmarks Nationalbank and "Det Private Beredskab" (the Danish banking sector's contingency association) on 24 August concluded an agreement with the board of Roskilde Bank on the acquisition of the assets and debt and other liabilities of Roskilde Bank, except for hybrid core capital and subordinated loan capital.

Roskilde Bank's activities are transferred to a new bank, to which Dan marks Nationalbank and Det Private Beredskab contribute capital in the range of kr. 4.5 billion. The purpose of this structure is to ensure the best possible financial foundation for settlement of the activities ac quired from Roskilde Bank. Danmarks Nationalbank and Det Private Beredskab have jointly appointed a competent board for the new bank.

Should the settlement process ultimately result in a profit after remu neration of the capital contributed, such profit shall be payable to the owners of the subordinate loan capital and the former shareholders of Roskilde Bank in that order.

Any losses shall initially be covered from the kr. 750 million con tributed by Det Private Beredskab.

The sales agreement was presented at an extraordinary general meet ing of Roskilde Bank on 1 September 2008 in accordance with Section 246 of the Danish Financial Business Act. It is subject to approval by the Danish Financial Supervisory Authority in accordance with Section 204 of said Act. Such approval has not yet been obtained. In addition, the Euro pean Commission must be notified of the acquisition under the provi sions on state aid in the EC Treaty.

The acquisition of Roskilde Bank by Danmarks Nationalbank and Det Private Beredskab was approved by the Danish Competition Authority on 1 September.

On 4 September, the Finance Committee of the Folketing (Danish par liament) approved a document on a government guarantee for any losses suffered by Danmarks Nationalbank in connection with the unlim ited credit facility provided on 10 July 2008. The government has indi cated that it will also ask the Finance Committee for a guarantee to cover any losses in connection with the acquisition and settlement of Roskilde Bank.

The above solution for Roskilde Bank has been chosen with a view to limiting the negative impact of the incident. As was the case at the beginning of July, Danmarks Nationalbank believed that the situation in relation to Roskilde Bank posed a serious threat to financial stability in Denmark. Roskilde Bank was the 8th largest bank in Denmark with ex tensive foreign financing. Suspension of payments by Roskilde Bank could have had an adverse knock-on effect on the Danish financial mar ket at a time when the sector overall has a deposit deficit in the range of kr. 500 billion and therefore relies heavily on financing in the capital markets.