Order on Recovery Plans for Credit Institutions, Mortgage Credit Institutions, Ship Finance Institutions and Investment Firms 1)

Pursuant to Section 71a, subsection 4, Section 71b, subsection 6, and Section 373, subsection 4, of the Act on Financial Business, cf. Act No. 406 of 29 March 2022, Section 98, subsection 4, Section 99, subsection 6, and Section 270, subsection 1, of Act No. 1155 of 8 June 2021 on Investment Firms and Investment Services and Activities, Section 5, subsection 2 and Section 14, subsection 2, of the Act on a Ship Finance Institution, cf. Act No. 646 of 18 May 2022, and Section 7 of Order No. 805 of 30 May 2022 on a Ship Finance Institution, it is hereby ordered:

Section 1

This Order applies to the following businesses:

1. Credit institutions.
2. Mortgage credit institutions.
3. A ship finance institution.
4. Investment firms that have permission to provide or perform one or both of the investment services and activities mentioned in Annex 1, Section A, Nos. 3 and 6, of the Act on Investment Firms and Investment Services and Activities.
5. Financial holding companies, cf. Section 5, subsection 1, No. 9, of the Act on Financial Business, when at least one subsidiary is a credit institution, a mortgage credit institution, or an investment firm that has permission to provide or perform one or both of the investment services and activities mentioned in Annex 1, Section A, Nos. 3 and 6, of the Act on Investment Firms and Investment Services and Activities.

Subsection 2. A business is understood in this Order to mean the businesses listed in subsection 1.

Content of the Recovery Plan and Simplified Recovery Plans for Certain Businesses

Section 2

Recovery plans prepared in accordance with Section 71a, subsection 1, and Section 71b, subsection 1, of the Act on Financial Business and Section 98, subsection 1, and Section 99, subsection 1, of the Act on Investment Firms and Investment Services and Activities, must be sufficient and comprehensive for the business's individual circumstances, cf. however subsections 2, 3, 4, and 6.

Subsection 2. Credit institutions with a balance sheet total exceeding DKK 12 billion, which are not designated as systemically important, cf. Sections 308 or 310 of the Act on Financial Business, mortgage credit institutions that are not designated as systemically important, cf. Sections 308 or 310 of the Act on Financial Business, and a ship finance institution, may prepare simplified recovery plans if the business specifically assesses in the recovery plan that the omitted parts are not relevant to the business.

Subsection 3. Credit institutions with a balance sheet total of more than DKK 1 billion and less than DKK 12 billion may prepare simplified recovery plans if the business ensures that the plan is sufficient and comprehensive for the business's individual circumstances.

Subsection 4. Credit institutions with a balance sheet total of DKK 1 billion or less may meet the requirement to prepare a recovery plan by submitting the capital raising plan that the credit institution has prepared in accordance with Annex 1, No. 14, of the Order on the Calculation of Risk Exposures, Capital Base and Solvency Requirements. The capital raising plan must be supplemented with capital indicators, cf. Section 5, subsection 2.

Subsection 5. The assessment of a credit institution's balance sheet, cf. subsections 2-4, is made on the basis of the credit institution's most recently submitted annual report.

Subsection 6. Investment firms may meet the requirement for a recovery plan in one of the following ways:

1. By preparing a recovery plan that describes how the firm will be able to conduct a solvent liquidation.
2. By preparing a capital raising plan in accordance with Annex 1, No. 14, of the Order on the Calculation of Risk Exposures, Capital Base and Solvency Requirements. The capital raising plan must be supplemented with capital indicators, cf. Section 5, subsection 2.

Subsection 7. The Danish Financial Supervisory Authority may make a decision on placement in a different category than specified in subsections 2-4 and 6, if the business's complexity so dictates. The Danish Financial Supervisory Authority's decision is made on the basis of Commission Delegated Regulation 2019/348/EU of 25 October 2018 supplementing Directive 2014/59/EU of the European Parliament and of the Council with regard to regulatory technical standards specifying the criteria for assessing the consequences for financial markets, other institutions and financing conditions of an institution becoming distressed.

1. The Order contains provisions that implement parts of Directive 2014/59/EU of the European Parliament and of the Council of 15 May 2014 establishing a framework for the recovery and resolution of credit institutions and investment firms, OJ 2014, No. L 173, p. 190.

Mergers

Section 3

A recovery plan must, for credit institutions that are not designated as systemically important, contain an overview of possible merger partners that the credit institution can contact if the credit institution comes under recovery.

Scenarios of Severe Macroeconomic and Financial Stress

Section 4

The scenarios of severe macroeconomic and financial stress that are relevant to the business and that must be included in the recovery plan, cf. Section 71a, subsection 1, No. 3, of the Act on Financial Business and Section 98, subsection 1, No. 3, of the Act on Investment Firms and Investment Services and Activities, must be designed in accordance with Annex 1.

Subsection 2. The scenarios must cover events affecting the individual business, events affecting the entire financial system, and one or more combinations of events affecting both the individual business and the entire financial system.

Subsection 3. For each scenario, it must be described which recovery measures the business assesses will be appropriate, as well as it must be justified that the business will be recoverable when applying the intended recovery measures.

Subsection 4. In a recovery plan prepared by a group, cf. Section 71b of the Act on Financial Business and Section 99 of the Act on Investment Firms and Investment Services and Activities, the group must further state for each scenario whether the group assesses that there are obstacles to implementing recovery measures in one or more of the businesses covered by the recovery plan, and whether there are significant practical or legal obstacles to the immediate transfer of capital or repayment of liabilities or assets within the group.

Indicators

Section 5

The business must set a number of quantitative and qualitative indicators in the recovery plan, which must define the times when the business must decide whether to implement one or more of the recovery measures listed in the recovery plan.

Subsection 2. The indicators must be sufficient and appropriate for the business's size, business model, strategy, and risk profile. Where the business's indicators relate to requirements set out in legislation, e.g., regarding capital or liquidity, the indicator must lie before the requirement set out in legislation. With regard to indicators relating to the legislation's capital requirements, these must be used consistently with the characteristics of the different requirements and the stress scenarios used.

Subsection 3. The business must, when setting the indicators, include the indicators covered by Annex 2, Section A.

Subsection 4. The business must, when setting the indicators, furthermore include the indicators covered by Annex 2, Sections B and C, unless the business assesses in the recovery plan that such indicators are not relevant to the business in question.

Subsection 5. The business may, when setting the indicators, furthermore include one or more of the indicators covered by Annex 2, Section D.

Subsection 6. A business may, regardless of subsection 1, implement recovery measures in accordance with the recovery plan in cases where a relevant indicator has not been breached, but where the business finds it appropriate under the circumstances.

Section 6

The business must inform the business's management within one working day of a breach of an indicator. The business must notify the Danish Financial Supervisory Authority of the breach of the indicator no later than within an additional working day after the internal notification.

Subsection 2. Institutions that use several threshold values for the same indicator must take a position in the recovery plan on at which threshold value the Danish Financial Supervisory Authority is to be notified.

Section 7

The business must evaluate at least once a year whether the indicators should be changed, including whether more indicators should be added.

Section 8

The business must be able to account to the Danish Financial Supervisory Authority for the process for setting and continuously evaluating the indicators, as well as the business must be able to account for the fact that the indicators will be effective.

Section 9

The business must regularly monitor the indicators. The recovery plan must contain a description of when and how the business's management is to be informed of the result of the monitoring.

Subsection 2. The business must at any time be able to provide the results of the regular monitoring of the indicators upon request from the Danish Financial Supervisory Authority.

Section 10

The business must notify the Danish Financial Supervisory Authority without undue delay if the board decides to implement recovery measures in accordance with the recovery plan, or if it decides not to implement recovery measures in accordance with the recovery plan.

Submission and Updating of the Recovery Plan

Section 11

Businesses designated as systemically important must submit the recovery plan to the Danish Financial Supervisory Authority annually no later than 1 October.

Subsection 2. Credit institutions with a balance sheet total exceeding DKK 1 billion, which are not designated as systemically important, and mortgage credit institutions that are not designated as systemically important, must submit the recovery plan to the Danish Financial Supervisory Authority annually no later than 1 November.

Subsection 3. Credit institutions with a balance sheet total of DKK 1 billion or less and investment firms must submit the recovery plan to the Danish Financial Supervisory Authority when the business updates the recovery plan.

Subsection 4. Businesses designated as systemically important, other mortgage credit institutions, and other credit institutions with a balance sheet total exceeding DKK 1 billion must, in addition to subsections 1 and 2, update and submit the recovery plan to the Danish Financial Supervisory Authority if there are changes to the business's commercial activities, financial situation, legal or organizational structure, which have significant significance for the recovery plan, or if the situation otherwise necessitates a change to this.

Subsection 5. The Danish Financial Supervisory Authority may decide that a recovery plan must be updated and submitted to the Danish Financial Supervisory Authority more often than specified in subsections 1-3, if the Danish Financial Supervisory Authority finds it necessary.

Penal Provisions

Section 12

Violation of Section 2, subsection 1, Section 4, Section 5, subsections 1 and 3, Sections 6-10, and Section 11, subsections 1-4, may be punished by a fine.

Subsection 2. Companies etc. (legal persons) may be subject to criminal liability according to the rules in Chapter 5 of the Criminal Code.

Entry into Force

Section 13

This Order enters into force on 1 February 2023.

Subsection 2. Order No. 1141 of 15 November 2019 on recovery plans for credit institutions, mortgage credit institutions and investment firms is repealed.

The Danish Financial Supervisory Authority, 16 January 2023 Jesper Berg / Ri Kaarup

Annex 1

Principles for the design of possible scenarios

1. A recovery plan should contain at least three possible scenarios to ensure coverage of an event affecting the entire financial system, an event affecting the individual business or group (idiosyncratic event), and a combination of an event affecting the entire financial system and the individual business or group.

2. Each scenario should be designed so that it meets each of the following requirements:
   a) The scenario must be based on events that are most relevant to the business or group in question, taking into account the business's or group's business and financing model, activities and structure, size or mutual connections with other businesses or with the financial system in general and in particular any identified vulnerabilities or weaknesses in the business or group. b) The events in the scenario risk causing the business's or group's collapse unless recovery measures are implemented in good time. c) The scenario must be based on events that are unusual but probable.

3. Where relevant, each scenario must include an assessment of the events' impact on the business's or group's
   a) available capital, b) available liquidity, c) risk profile, d) profitability, e) operations, including payment and settlement operations, and f) reputation.

4. Reverse stress tests can be used to show what is required for a business's or group's business model to no longer be viable unless one or more recovery measures are successfully implemented. Reverse stress tests can be used as a starting point for developing the scenarios that are to be included in the recovery plan.

Possible Scenarios of Financial Difficulties

5. Taking into account the principle of proportionality, the number of possible scenarios should be in appropriate proportion to the nature, size, mutual connections with other businesses and with the financial system in general, and financing models of the business or group.

6. At least one scenario should be included for each of the following types of events:
   a) An event affecting the entire system, which is an event that can have serious negative consequences for the financial system and the real economy. b) An idiosyncratic event, which is an event that can have serious negative consequences for a single business, a single group, or a business in a group. c) A combination of events affecting the entire system and idiosyncratic events, which occur simultaneously and interactively.

7. Systemically important institutions identified in accordance with Sections 308 or 310 of the Act on Financial Business should contain more than three scenarios.

8. The possible scenarios should cover both slow and fast unwanted events.

9. Both events affecting the entire system and idiosyncratic events should relate to events that are most relevant to the business or group as described in No. 2, letter a). The scenarios should therefore be based on events that are different from those referred to in Nos. 10 and 11, if the latter are less relevant to the business or group as stated in No. 2, letter a).

Events Affecting the Entire System

10. In the design of scenarios based on events affecting the entire system, account should be taken of the relevance of at least the following events affecting the entire system:
    a) Breakdown of significant counterparties affecting financial stability. b) Fall in available liquidity on the interbank lending market. c) Increased country risk and general capital flows from a country in which the business or group has significant activities. d) Unfavourable development in the price of assets on one or more markets. e) Macroeconomic downturn.

Idiosyncratic Events

11. In the design of idiosyncratic scenarios, account should be taken of the relevance of at least the following idiosyncratic events:
    a) Breakdown of significant counterparties. b) Damage to the business's or group's reputation. c) Serious outflow of liquidity. d) Unfavourable development in the prices of assets that the business or group is particularly affected by. e) Serious credit losses. f) Losses due to operational risks.

Annex 2

Indicators in Recovery Plans

Section A

Minimum list of mandatory categories of indicators in recovery plans:

1. Capital indicators
2. Liquidity indicators
3. Profitability indicators
4. Indicators of asset quality

Section B

Categories of indicators that must be included in the recovery plan, unless the business assesses that the indicators are not relevant:
5. Market-based indicators
6. Macroeconomic indicators

Section C

Indicators that must be included in the recovery plan, unless the business assesses that the indicators are not relevant:

1. Capital indicators:
   a) Common Equity Tier 1 ratio b) Total capital ratio c) Leverage ratio d) Minimum requirement for own funds and eligible liabilities (MREL) and the total loss absorbing capacity (TLAC)
2. Liquidity indicators:
   a) Liquidity Coverage Ratio (LCR) b) Net Stable Funding Ratio (NSFR) c) Available collateralized assets from the central bank d) Liquidity position (The institution's total liquid assets, regardless of whether they can be included in the LCR calculation and whether the assets can be pledged to the central bank or not.)
3. Profitability indicators:
   a) Return on assets or return on equity b) Significant operational losses
4. Indicators of asset quality:
   a) Growth in non-performing loans or loans with repayment problems b) Coverage ratio (provisions in relation to loans written off)
5. Market-based indicators:
   a) Rating or ratings under review or downgraded b) CDS Spreads c) Share price variation
6. Macroeconomic indicators:
   a) GDP fluctuations b) Credit spread on sovereign exposures

Section D

List of possible supplementary indicators (the list is not exhaustive and is for inspiration)

1. Capital indicators:
   a) Retained earnings and reserves / equity b) Negative information about the financial position of significant counterparties
2. Liquidity indicators:
   a) Group concentration of liquidity and funding sources b) Total funding costs (via deposit-based and market-based financing) c) Average maturity of market-based financing d) Contractual maturity mismatch e) Costs of market-based financing
3. Profitability indicators:
   a) Earnings per cost unit (operating costs / operating income) b) General interest margin
4. Indicators of asset quality:
   a) Loans in arrears or loans with repayment problems / equity b) Total loans in arrears or loans with repayment problems / total loans. c) Growth in provisions on financial assets d) Geographic or sector concentration of loans in arrears or loans with repayment problems e) Exposures with credit concessions / total exposures
5. Market-based indicators:
   a) Price to book value b) The business's reputation or significant damage to the reputation
6. Macroeconomic indicators:
   a) Ratings under negative review or downgraded on sovereign exposures b) Unemployment rate