If financial instability occurs, the aim is to minimise the negative consequences. Accordingly, it is important that relevant authorities are prepared for crisis management. Danmarks Nationalbank and other authorities have a number of tools for this purpose, including:
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Lender of last resort
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Emergency Liquidity Assistance (ELA)
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Management of failing banks
You can read more about the tools below.
Lender of last resort
In the event of a liquidity shortfall that could entail systemic risks, Danmarks Nationalbank can act as the lender of last resort to protect the institutions’ liquidity and stabilise the situation.
Danmarks Nationalbank is the lender of last resort. This means that if several credit institutions experience liquidity difficulties at the same time, e.g. as a result of a general freeze of the financial markets that may threaten financial stability, Danmarks Nationalbank may decide to expand the institutions’ general access to loan facilities at Danmarks Nationalbank, providing them with liquidity.
This happened, for example, in connection with the financial crisis as Danmarks Nationalbank introduced a number of temporary loan facilities in 2008-2012, and most recently during the coronavirus pandemic in 2020. In practice, each crisis has its own characteristics and the necessary tools – and the need to use them varies from time to time.
Emergency Liquidity Assistance, ELA
Danmarks Nationalbank may provide extraordinary liquidity support to a solvent credit institution that has an acute liquidity need and is unable to raise liquidity in the market. This is called Emergency Liquidity Assistance or ELA.
ELA is granted as an element of compliance with Danmarks Nationalbank’s objective to contribute to financial stability. In order to receive ELA, the credit institution must be solvent and creditworthy, among other things, and thus able to repay the loan when it matures Adequate collateral must also be pledged to Danmarks Nationalbank for the full amount granted.
ELA is an individual loan agreement in which loan terms and collateral basis may be broader than under Danmarks Nationalbank’s normal lending facility. For example, ELA loans may have longer maturities than the normal weekly lending or, an institution may, under special conditions, be authorised to pledge a share of its loan portfolio as collateral for ELA.
No institution is excluded from being granted ELA in advance, but Danmarks Nationalbank will assess in each case whether financial stability considerations justify ELA.
Management of failing banks
During the financial crisis in 2008-2012, a number of banks became failing and had to be taken over by the authorities. In the years following the financial crisis, one of the pillars of international financial legislation has been to ensure that banks can be subject to recovery and resolution without the use of government resources.
In Denmark, the Danish Financial Supervisory Authority and Finansiel Stabilitet are responsible for planning and possibly implementing recovery and resolution of an institution.
In order to prevent that the government has to pay the bill for recovery and resolution of banks, there are two sector-financed funds in Denmark, the Guarantee Fund and the Resolution Fund, to be used if a bank or mortgage credit institution becomes failing.
Danmarks Nationalbank must be consulted about the resolution plans for the largest credit institutions, but has no direct role in the resolution/restructuring of credit institutions.
Learn more
Learn more about the Danish Financial Supervisory Authority and Finansiel Stabilitet on their own websites.