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 rather than 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 three current topics: branches of foreign credit institutions, systemic risks in the Danish market for uncollateralised overnight deposits, and market-based risk measures for banks.

The profits of the Nordic banking groups, including Danske Bank and Nordea, rose by 22 per cent in 2003, partly as a result of cost reductions. Losses and provisions vary across the groups, but increased on aggregate in 2003. The level is, however, still low. Capital adequacy remained unchanged in relation to 2002.

For the remaining Danish banking institutions, total profits increased by 84 per cent in 2003, primarily as a result of capital gains from the sale of Totalkredit to Nykredit. The costs of the Danish banking institutions rose, while losses and provisions were unchanged. Pronounced variations are seen between the institutions. Capital adequacy increased for the large banking institutions.

The overall assessment is that resilience remains unchanged for the Nordic groups, while the large capital gains have strengthened the resilience of the Danish banking institutions significantly compared to 2002.

Danish banking institutions can be expected to have significant released funds at their disposal in the coming years. There will be capital gains on the sale of Totalkredit to Nykredit, the new international accounting standards will entail lower provisions on a given loan portfolio, and new capital-adequacy rules (Basel II) are expected to imply a relatively large relaxation of the capital requirement. It is important that the banking institutions carefully consider how large a part of the funds released they need to apply as buffers.

The financial markets in Denmark more or less followed the international development in 2003. Stock prices rose significantly after having fallen for several years, and interest rates remained low. The increased optimism led to higher bank earnings from stock-related trading and asset management. Pension companies in particular have benefited from the development in the financial markets, and at end-2003 only one company was in the "yellow light" according to the Danish Financial Supervisory Authority. At end-2002 two companies were in the "red light" and 11 in the "yellow light".

The estimated failure rates among companies in the various sectors, which are calculated using Danmarks Nationalbank's failure-rate model, did not increase in 2003. The reason may be that the companies have become better at adapting costs to the weak economic climate.

The households' debt burden is still increasing, but the ability to meet payments has improved owing to the low level of interest rates. Households in Denmark have a higher level of debt in relation to income than in the other Nordic countries, but on the other hand housing wealth as a ratio of income is higher in Denmark. However, the high level of indebtedness makes the households sensitive to e.g. social events such as unemployment and divorce.

The corporate sector and the households have benefited from the low level of interest rates in recent years. The international discussion on financial stability increasingly focuses on the sensitivity to rising interest rates.

The current EU regulation and structure for supervision and oversight of banks do not sufficiently envisage a situation where a bank has a branch which carries very significant weight in the banking sector in another EU member state. Within the EU it is necessary to create a framework for more binding cooperation between the authorities in the relevant countries.


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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 rather than 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 three current topics: branches of foreign credit institutions, systemic risks in the Danish market for uncollateralised overnight deposits, and market-based risk measures for banks. The profits of the Nordic banking groups, including Danske Bank and Nordea, rose by 22 per cent in 2003, partly as a result of cost reductions. Losses and provisions vary across the groups, but increased on aggregate in 2003. The level is, however, still low. Capital adequacy remained unchanged in relation to 2002. For the remaining Danish banking institutions, total profits increased by 84 per cent in 2003, primarily as a result of capital gains from the sale of Totalkredit to Nykredit. The costs of the Danish banking institutions rose, while losses and provisions were unchanged. Pronounced variations are seen between the institutions. Capital adequacy increased for the large banking institutions. The overall assessment is that resilience remains unchanged for the Nordic groups, while the large capital gains have strengthened the resilience of the Danish banking institutions significantly compared to 2002. Danish banking institutions can be expected to have significant released funds at their disposal in the coming years. There will be capital gains on the sale of Totalkredit to Nykredit, the new international accounting standards will entail lower provisions on a given loan portfolio, and new capital-adequacy rules (Basel II) are expected to imply a relatively large relaxation of the capital requirement. It is important that the banking institutions carefully consider how large a part of the funds released they need to apply as buffers. The financial markets in Denmark more or less followed the international development in 2003. Stock prices rose significantly after having fallen for several years, and interest rates remained low. The increased optimism led to higher bank earnings from stock-related trading and asset management. Pension companies in particular have benefited from the development in the financial markets, and at end-2003 only one company was in the "yellow light" according to the Danish Financial Supervisory Authority. At end-2002 two companies were in the "red light" and 11 in the "yellow light". The estimated failure rates among companies in the various sectors, which are calculated using Danmarks Nationalbank's failure-rate model, did not increase in 2003. The reason may be that the companies have become better at adapting costs to the weak economic climate. The households' debt burden is still increasing, but the ability to meet payments has improved owing to the low level of interest rates. Households in Denmark have a higher level of debt in relation to income than in the other Nordic countries, but on the other hand housing wealth as a ratio of income is higher in Denmark. However, the high level of indebtedness makes the households sensitive to e.g. social events such as unemployment and divorce. The corporate sector and the households have benefited from the low level of interest rates in recent years. The international discussion on financial stability increasingly focuses on the sensitivity to rising interest rates. The current EU regulation and structure for supervision and oversight of banks do not sufficiently envisage a situation where a bank has a branch which carries very significant weight in the banking sector in another EU member state. Within the EU it is necessary to create a framework for more binding cooperation between the authorities in the relevant countries.

					Publication overview - Contents - Top/Bottom - Previous/Next

Introduction