Financial stability

Danmarks Nationalbank publishes an annual report on financial stability in Denmark. The purpose is to assess whether the financial system is so robust that any problems in the financial sector do not spread and impede the functioning of the financial markets as efficient providers of capital for companies and households. The approach is to consider the general risks to the financial system, and not the situation of the individual financial institutions. That is the task of the Danish Financial Supervisory Authority. The two-part report first analyses the development in financial stability, with emphasis on the banking institutions. The second part of the report considers four current topics.

The Danish banking institutions have shown resilience to the slowdown in the economy and the increased uncertainty in the financial markets, with falling stock prices and interest rates in 2001 and 2002. The banking institutions' overall earnings are still sound. Losses and provisions have even declined, although the spread between the institutions has widened. Those with the highest growth in lending in recent years have also suffered the greatest losses.

Some banking institutions have reduced costs, while most institutions still face rising costs.

Capital adequacy has generally increased slightly in 2002, which is in harmony with the greater uncertainty concerning the economic development.

Overall, the banking institutions thus appear to be slightly more resilient to losses than one year before. The uncertainty is instead associated with the duration of the economic slowdown.

Danmarks Nationalbank has estimated a model to calculate the probability of corporate failures within the next years. The results of the model indicate that the probability of corporate failure has increased slightly in all sectors. IT and telecom is still the most vulnerable sector. The spread in the probability of corporate failure has widened in all sectors in the last few years, which has led to greater uncertainty in relation to credit expansion to the corporate sector.

The households have increased their indebtedness, but in view of the low level of interest rates, the interest burden has not increased equivalently. Many homeowners have used mortgage-credit loans to repay bank debt since the banks' lending rates are generally higher than interest rates for mortgage credit.

Developments in the financial markets in 2002 had especially negative consequences for the pension sector. There were massive capital losses on stocks, and the capital gains on the bond portfolios are not sufficient to cover the need for further provisions for pension commitments. Overall, however, the pension companies have been able to increase their reserves, since new accounting regulations have made it possible to book some of the provisions as reserves.

A secure and efficient infrastructure for settlement of payments is a prerequisite to financial stability. It is important to have sufficient liquidity when it is required so as to prevent any problems experienced by one or several participants from spreading to others. A crisis scenario has been simulated whereby the access to procure liquidity is reduced drastically. The outcome shows that currently the sector as a whole has ample liquidity at its disposal. There is also generally sufficient liquidity at the institutional level.


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				Introduction
				Danmarks Nationalbank publishes an annual report on financial stability in Denmark. The purpose is to assess whether the financial system is so robust that any problems in the financial sector do not spread and impede the functioning of the financial markets as efficient providers of capital for companies and households. The approach is to consider the general risks to the financial system, and not the situation of the individual financial institutions. That is the task of the Danish Financial Supervisory Authority. The two-part report first analyses the development in financial stability, with emphasis on the banking institutions. The second part of the report considers four current topics. The Danish banking institutions have shown resilience to the slowdown in the economy and the increased uncertainty in the financial markets, with falling stock prices and interest rates in 2001 and 2002. The banking institutions' overall earnings are still sound. Losses and provisions have even declined, although the spread between the institutions has widened. Those with the highest growth in lending in recent years have also suffered the greatest losses. Some banking institutions have reduced costs, while most institutions still face rising costs. Capital adequacy has generally increased slightly in 2002, which is in harmony with the greater uncertainty concerning the economic development. Overall, the banking institutions thus appear to be slightly more resilient to losses than one year before. The uncertainty is instead associated with the duration of the economic slowdown. Danmarks Nationalbank has estimated a model to calculate the probability of corporate failures within the next years. The results of the model indicate that the probability of corporate failure has increased slightly in all sectors. IT and telecom is still the most vulnerable sector. The spread in the probability of corporate failure has widened in all sectors in the last few years, which has led to greater uncertainty in relation to credit expansion to the corporate sector. The households have increased their indebtedness, but in view of the low level of interest rates, the interest burden has not increased equivalently. Many homeowners have used mortgage-credit loans to repay bank debt since the banks' lending rates are generally higher than interest rates for mortgage credit. Developments in the financial markets in 2002 had especially negative consequences for the pension sector. There were massive capital losses on stocks, and the capital gains on the bond portfolios are not sufficient to cover the need for further provisions for pension commitments. Overall, however, the pension companies have been able to increase their reserves, since new accounting regulations have made it possible to book some of the provisions as reserves. A secure and efficient infrastructure for settlement of payments is a prerequisite to financial stability. It is important to have sufficient liquidity when it is required so as to prevent any problems experienced by one or several participants from spreading to others. A crisis scenario has been simulated whereby the access to procure liquidity is reduced drastically. The outcome shows that currently the sector as a whole has ample liquidity at its disposal. There is also generally sufficient liquidity at the institutional level.

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Introduction