This should also result in risk being priced into these loans to banks. Creditors have been written down while a bank was kept open. On 5 February 2011, the Danish resolution authority Finansiel Stabilitet A/S took control of Amagerbanken, a midsized Danish bank. 13 All equity was written down to zero, and non-guaranteed deposits and wholesale funding were initially written down by nearly half of their original value. This was done over a weekend. On Monday morning, the online banking service was open and all  10  The Bank Recovery and Resolution content/EN/TXT/?uri=celex:32014L0059. 11  A more detailed description of the rules for bail-in and how it works is found in Vale, Bent (2014), “Kriseløsing av banker ved hjelp av bail-in – momenter ved innføring i Norge” [Bank resolution with the aid of bail-ins – factors associated with introduction in Norway], Norges Bank Staff Memo 12/2014 (in Norwegian). 12  In addition, a number of other types of liabilities are exempted, such as covered bonds, accrued but unpaid salary, taxes payable and liabilities to ordinary commercial suppliers of goods and services necessary for the daily functioning of the bank. 13  A detailed description of the resolution of Amagerbanken is found in the Finansiel Stabilitet A/S Annual Report for 2011 (in Danish). 6  Directive  may  be  found  at  http://eur-lex.europa.eu/legal-  BIS central bankers’ speeches  depositors obtained access to their remaining deposits. The bank was kept open as a subsidiary of Finansiel Stabilitet A/S.
The bank’s critical functions were kept running. Shareholders and unsecured creditors were not bailed out. Over time, the creditors who were not covered by the deposit guarantee were paid back around 85 percent of the value of their original claims. The value of the bank’s assets was preserved to a larger extent than if the bank had been wound up. Danish banks’ funding costs rose following the resolution of Amagerbanken. However, it did not trigger a systemic crisis in the Danish banking sector, despite its occurrence in the middle of the European debt crisis. What the Danes got was a pricing of the true risk in their banks. Over time, this provides a basis for a less risky financial system. Bail-in may nevertheless be difficult to implement. Bail-in of a large bank, that is a bank with substantial liabilities, will inflict losses on a large number of creditors. That is the intention. But if these liabilities are owned by institutions that are critical to the functioning of the financial system, the problems in one bank can spread quickly. If the losses are substantial, the authorities run the risk of triggering a systemic crisis. Moreover, bail-in of creditors may make funding more expensive for other banks, particularly in turbulent times. For large, systemically important banks, the time-inconsistency problem remains. This weakens the credibility of the bail-in regime. Therefore, the Bank Recovery and Resolution Directive also provides for measures intended to bolster credibility. An important measure is that national authorities are to prepare resolution plans for individual banks.