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"Report and Accounts 2000"

The Domestic Financial System

The volume of outstanding domestic krone-denominated bonds rose by 4 per cent in 2000. This reflects a decrease in the circulating volume of government bonds, and an increase in the volume of mortgage-credit bonds.

As an element of the Nordic stock-exchange cooperation, NOREX, in October 2000 the Copenhagen Stock Exchange extended the joint trading system, SAXESS, to include bond trading. On 1 January 2000 VP A/S - The Danish Securities Centre was restructured as a limited liability company.

For the sixth consecutive year the banks presented a sound surplus. Net income from interest is still the largest source of revenue.

There was a certain dampening of activity in the mortgage-credit sector, which is related to a lower influx of new loans and a lower conversion volume.

There was a large increase in the capital managed by investment associations.

The bond market

The outstanding volume of domestic krone-denominated bonds was nominal kr. 1,982 billion at the end of 2000, which is an increase by 4 per cent on 1999, cf. Table 6.

Table 6 Outstanding volumes of domestic krone-denominated bonds (nominal value)

Kr. billion	1999	2000
Government bonds	649	626
Mortgage-credit bonds	1,141	1,240
Other bonds	119	116
Total	1,908	1,982

Note:

Listed on the Copenhagen Stock Exchange

As a consequence of the government budget surplus the circulating volume of government bonds fell by kr. 23 billion, whereas the circulating volume of mortgage-credit bonds increased by a total of kr. 99 billion during the year. As a per cent of GDP the volume of outstanding bonds decreased from 157 per cent of GDP in 1999 to 154 per cent 2000.

In 2000 mortgage-credit bonds for kr. 100 billion were redeemed prematurely. For comparison, the figure for 1999 was kr. 231 billion. The decrease reflects that changes in interest rates have not been sufficient to justify further conversions, cf. Chart 29.

Chart 29 Early redemptions of mortgage-credit bonds and bond yields

Almost half the circulating volume of krone-denominated bonds is held by financial institutions, insurance companies and pension funds, cf. Chart 30. Non-resident investors hold 18 per cent of the bonds.

Chart 30 Ownership of circulating krone-denominated bonds, end-2000

In 2000 non-resident investors sold krone-denominated bonds for kr. 17 billion. Sales of government bonds totalled kr. 13 billion, while sales of mortgage-credit bonds totalled kr. 4 billion. In 1999 net purchases by non-resident investors were kr. 15 billion. Non-residents' holdings of krone-denominated bonds still predominantly comprise government bonds, but the proportion of mortgage-credit bonds is rising.

The minimum coupon rate ^[1] was raised from 4 to 5 per cent on 1 July 2000, but lowered again to 4 per cent on 1 January 2001. The increase affected the issue of government bonds, as sales of one series with a coupon of 4 per cent had to be discontinued.

The development in interest rates in the Danish bond market is described on p. 53ff.

Change in market conventions in the Danish bond market
In 1997 a working group of market participants was set up to review EMU and the bond market. One of the recommendations of this working group was that, no matter whether Denmark adopted the euro or not, the Danish market conventions for calculation of the coupon rate on the purchase and sale of bonds should be aligned with international standards. The aim was to make Danish bonds more attractive to international investors.

The recommendations were implemented in the bond market in February 2001 and comprise the following elements: the day-count convention in the Danish market is changed from 30/360 to actual/actual. This means that when bonds are traded the interest is calculated on the basis of the actual number of days from and including the last due date to the value date of the trade. The new convention thus gives a fairer view than the old method of calculation, which operated with 30-day months. In addition, the ex-coupon period has been abolished, so that in future the owner of the bond on the day before the due date will receive the coupon interest for the term in question. Previously, this payment accrued to the owner 30 days before the due date. At the same time, the drawing procedure for mortgage-credit bonds and government serial loans has been changed from a model based on redemption by lot to a purely mathematical model. This means that in future the same relative share of all investors' bond holdings will be drawn. As a result of the new procedure, the unit size for Danish bonds has been changed from kr. 1,000 to kr. 0.01.

Measures in the stock-exchange area, etc.

European stock-exchange cooperation, etc.
Mergers, acquisitions and cooperation are still on the agenda of the European stock exchanges. However, the planned alliance^[2] between eight European stock exchanges was abandoned in 2000. In March 2000 the stock exchanges in Paris, Amsterdam and Brussels announced their merger under the name of Euronext with a common trading system.

In May 2000 the London Stock Exchange and Deutsche Börse announced that they would be merging.^[3] However, the attempted merger failed in September 2000. In the autumn of 2000 the Swedish OM Group made an unsuccessful bid for the London Stock Exchange.

The consolidation trend among EU securities centres also continues. The background includes the demand for easy and efficient settlement of cross-border trades, as well as a need for joint clearing and settlement when stock exchanges form alliances.

The Luxembourg-based international securities centre, Cedel, merged with the German securities centre Deutsche Börse Clearing under the name of Clearstream. French Sicovam merged with the international securities centre Euroclear, which went on to acquire a controlling interest in Dutch Negicef and Belgian CIK. Negicef and CIK have signed letters of intent to merge with Euroclear. This cooperation supports Euronext, which in the longer term will integrate trade, clearing and settlement.

Nordic stock-exchange cooperation
In 1998 the Copenhagen Stock Exchange and OM Stockholmsbörsen entered into a cooperation agreement on the establishment of a joint Nordic securities market, NOREX, comprising all types of securities. The Nordic alliance is based on a joint trading system, SAXESS.

The Iceland Stock Exchange and the Oslo Stock Exchange joined the NOREX alliance in 2000. The Iceland Stock Exchange switched to the joint trading system in October 2000, while the system is expected to be in operation in Norway before the end of 2001. Once the system has been introduced in Norway, it will be possible to trade securities in all four Nordic countries via one system. The three Baltic stock exchanges have signed letters of intent to join NOREX. In February 2001 the Finnish HEX Group offered to acquire a controlling interest in the Estonian stock exchange.

In June 1999 the Copenhagen Stock Exchange introduced the joint trading system SAXESS in the share market. In October 2000 SAXESS was extended to include bond trading. After the transfer of bond trading to SAXESS the Copenhagen Stock Exchange can once again offer the Danish securities market share and bond trading on the same system. The Iceland Stock Exchange and OM Stockholmsbörsen have also opened up for trade in both shares and bonds via the SAXESS system.

New regulation of the stock-exchange area, etc.
In April 1998 the Securities Market Council set up a working group to prepare an order on best execution on the stock market, based on the Rules of Ethics of the Copenhagen Stock Exchange. A draft order was submitted for general consultation in late 2000.

In December 2000 the Folketing (Parliament) passed a bill to amend the taxation of pension yields, cf. the Nationalbank's response on p. 157. The new Act introduces a uniform 15 per cent tax on all pension yields from shares, bonds and real property. In addition, the share ceiling is made more flexible; in future, the financial solvency of the individual institution will determine how large a proportion of the assets can be placed in shares. The new rules on taxation of institutional investors' capital yields are neutral in relation to portfolio restructuring within the sector. With a few exceptions, the Act takes effect as from the 2001 income year.

Restructuring of vp a/s - the Danish Securities Centre as a limited liability company

On 1 January 2000, VP A/S - The Danish Securities Centre, was restructured from a private self-governing institution to a limited liability company. This was done in order to give VP optimum opportunities to establish a more business-oriented profile under changing market conditions, possibly via a merger or other form of closer international cooperation.

The decision was taken by the Board of VP and was effected in accordance with the restructuring provisions of the Danish Securities Trading Act. VP's existing equity capital was encapsulated in a new company as an undestributable securities reserve. The shareholders in the new company comprise the stakeholders previously represented on the Board of VP, who also represent VP's most significant customers. Banks and stockbrokers hold 43 per cent of the share capital, mortgage-credit institutes 28 per cent, Danmarks Nationalbank 13 per cent, issuers of shares 8 per cent and investors 8 per cent.

Statutory framework for the financial sector

Joint Act on Financial Enterprises
In August 1997 the government appointed a Committee on "the Financial Sector after the Year 2000". The report of the Committee was published in September 1999. Subsequently a bill was prepared and introduced. It implemented a number of recommendations from the Committee, including a joint Act on Financial Enterprises.

On the basis of the greater integration of the financial markets, including the formation of financial conglomerates, it has been deemed necessary to implement a new structure for the financial supervisory acts, cf. the Nationalbank's consultative response, p. 153f. The aim is to ensure that similar financial products are treated in the same way and to introduce a number of measures to simplify and modernise this area. Consequently, related provisions from the Act on Danish Commercial Banks and Savings Banks, the Act on Insurance Companies, the Act on Investment Companies, the Mortgage Credit Act and the Act on Company Pension Funds will be compiled in an Act on Financial Enterprises.

The bill compiles the supervisory provisions and other statutory areas where there is presently a high degree of concurrence in the financial acts. These areas are: definitions, rules on good practice, management rules, group rules, accounting rules and rules of supervision. A number of provisions will be adjusted and some will be updated.

The sector-specific provisions of the various financial acts will remain in force. However, there are plans subsequently to review the other elements of the financial acts with a view to achieving an even more uniform structure and further simplification of e.g. the provisions on the establishment of financial enterprises, permission to carry on financial activities, solvency, mergers, etc.

In connection with the compilation, the accounting provisions are amended in accordance with the proposed amendments in the bill on annual accounts. The latter is inspired by the latest developments in the accounting field, including the EU's recent accounting strategy based on the international accounting standards, IAS, issued by the International Accounting Standards Committee, IASC. It is also proposed that the dual auditor system be abolished.

Status of new capital-adequacy rules
In January 2001 the Basle Committee^[4] issued a new consultative document on new capital requirements for banks^[5]. In February 2001 it was followed up by a new consultative document from the European Commission.^[6]

The reason for introducing new rules is a need to establish a closer relationship between the banks' actual risk profile and the capital requirement. For instance, the existing rules from 1988 do not distinguish between the credit risk in relation to private borrowers and corporate customers, which means that the present standard capital requirement is 8 per cent, irrespective of the composition of this element of the loan portfolio.

The proposed new rules will to a greater extent than the existing set of rules take financial innovation, modern risk-management techniques, and internal control procedures, and the new types of risk into account, cf. Box 5. Under the existing rules, capital requirements apply only to credit and market risks. However, capital requirements in relation to operational risks are also proposed. The structure of the new capital-adequacy rules gives the banks an incentive to enhance and improve their own risk management. The underlying philosophy is that the individual bank is best at assessing its own "true" risk profile.

Box 5 The new capital-adequacy rules

The banks

For the sixth consecutive year the banks' financial statements presented a sound surplus. In 2000, the result after tax was kr. 14.3 billion. Net income from interest, which rose by 6.4 per cent on 1999, is still the largest source of revenue for the banks. Deposits and lending increased by 1 per cent and 13 per cent, respectively. Net income from fees and commission increased by 22.2 per cent, partly as a result of increasing brokerage and administration fees related to customers' increased securities trading.

Value adjustment of bonds, shares, foreign exchange and capital interests also contributed to the improved result. Total value adjustment increased from kr. 5.2 billion in 1999 to kr. 9.2 billion in 2000.

Losses and provisions rose marginally in 2000, to kr. 3.0 billion from kr. 2.6 billion in 1999, and are still low.

Structural changes
The year 2000 also saw a number of structural changes within the banking sector, with the creation of national and cross-border financial conglomerates. In recent years the focus has shifted from the domestic Danish market to a single Nordic market. The term conglomerates is used to describe groups carrying out business in a number of financial market segments (banking, mortgage credit, insurance, etc.), whereas traditional financial groups typically operate in a single market segment. The market share of the financial conglomerates has increased significantly in terms of total balance sheet, cf. Chart 31. In 1989 financial conglomerates accounted for less than 10 per cent of the total balance sheet. This figure had risen to just over 60 per cent by 1999.

Chart 31 Groups and conglomerates' share of total balance sheet

The largest cross-border merger so far took place in the spring of 2000 when Unidanmark merged with Finnish/Swedish MeritaNordbanken, thereby creating the largest financial conglomerate in the Nordic region with a major physical presence in several Nordic countries. The conglomerate was named Nordic Baltic Holding, but has subsequently – after merging in October 2000 with the Norwegian bank, Christiania Bank og Kreditkasse – been renamed Nordea.

Another example of this trend is the merger between Danske Bank and RealDanmark from the autumn of 2000. The merger led to the creation of in the second-largest financial conglomerate in the Nordic region.

The mortgage-credit institutes

Activities in the mortgage-credit sector dampened to a degree, which was due mainly to a decrease in re-mortgaging activities and a lower volume of new loans. Conversions, cf. Chart 29, accounted for a large proportion of gross new lending in 1998 and 1999.

In 2000 two new mortgage-credit products were launched: interest-rate guarantee for adjustable-rate loans, and reversed mortgage loans. Interest-rate guarantee entails that the borrower pays a premium in return for which a limit is placed on the interest rate on the loan in connection with the annual refinancing of the entire adjustable-rate loan. The reversed mortgage loan product is a variant of the well-known products offering home-owners loans against the free mortgageable value of the home. Examples are supplementary loans and bank loans.

In the summer of 2000 a number of general amendments to the Mortgage Credit Act were adopted, and subsequently an order was issued on the mortgage-credit institutes' bond issues, balance principle and interest and foreign-exchange risks. The order took effect from 1 April 2001, cf. p. 152. The new rules will contribute to greater flexibility in the mortgage-credit sector, without significantly increasing the risk exposure of the mortgage-credit institutes or weakening the special status of mortgage-credit bonds. At the same time, clearer and more up-to-date rules have been introduced in a number of areas.

The investment associations

During the last four years there has been a large increase in the capital managed by investment associations, cf. Chart 32. As of 31 December 2000 the assets totalled kr. 257 billion, an increase of kr. 53 billion on 1999.

Chart 32 Assets of the investment associations

Investment associations based on foreign shares achieved the largest growth in assets, i.e. kr. 32 billion from 1999 to 2000. The increase in value for foreign shares comprises new emissions of kr. 48 billion, and capital losses of kr. 16 billion.

The trend is for greater specialisation of the investment associations. Examples are investment associations with focus on IT, ethics or biotechnology.

VB Finans and Himmerlandsbanken

VB Finans
At the end of 1993 the Nationalbank made available a government-guaranteed overdraft of maximum kr. 4.4 billion to VB Finans, the company responsible for the winding-up of Varde Bank. As described in the 1996 Annual Report, p. 54f, at the beginning of 1996 bankruptcy proceedings were instigated against VB Finans, at the request of the Board of Directors. VB Finans af 1996, which in connection with the winding-up took over all VB Finans' assets and certain liabilities, including the Nationalbank's overdraft facility, worked throughout 2000 on winding up the activities of Varde Bank.

During 2000 the company was able to pay approximately kr. 0.1 billion to the Nationalbank as a consequence of the winding-up of exposures and the sale of properties. The company's debt to the Nationalbank had thus been settled by the end of the year.

The ongoing winding-up of the company first and foremost concerns the conclusion of a number of court cases filed against the winding-up estate. In the autumn of 2000 the Nationalbank filed two cases against the estate, both related to the preferential position of the subordinate capital in the estate. The administration of the winding-up estate will continue for a few more years. It is therefore still not possible to calculate the total costs of the winding-up of Varde Bank.

Himmerlandsbanken
In 2000 no amounts were disbursed under the guarantee provided by the Nationalbank and a number of banks to the winding-up estate of Himmerlandsbanken, cf. the 1993 Annual Accounts p. 48ff. A number of court cases filed against the winding-up estate have not yet been concluded. Consequently, it is still not possible to calculate the total costs of the winding-up of Himmerlandsbanken.

Footnotes

[1] A bond complies with the minimum-coupon-rate rule with the designation "blue-stamped" if the coupon rate is greater than or equal to the minimum-coupon rate applying to the period during which the bond is issued. On an increase in the minimum-coupon rate issues in many open series will normally be discontinued.

[2] For further details see Danmarks Nationalbank, Report and Accounts, 1999.

[3] Later this merger was extended to include the American Nasdaq exchange.

[4] The Basle Committee, whose secretariat is at the Bank for International Settlements (BIS), was set up in 1975 with the purpose of strengthening the stability of the international financial system. The following countries are represented on the Committee: Belgium, Canada, France, Germany, Italy, Japan, Netherlands, Sweden, UK, USA, Switzerland and Luxembourg.

[5] See also Suzanne Hyldahl, New Capital-Adequacy Rules for Banks, Danmarks Nationalbank, Monetary Review, 1st Quarter 2001.

[6] The first consultative documents on proposed new capital-adequacy rules were published by the Basle Committee in June 1999 and by the European Commission in November 1999. The work of the two bodies has been carried out in parallel, but while the Basle Committee has focused on standards for the large international banks, the European Commission has had a more EU-specific angle, covering both banks and investment companies. However, the two consultative documents are in many ways similar. The consultations for both proposals run until the end of May 2001. The new standards are expected to be implemented in the national legislation of the EU member states in 2004.

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Version 1.0 March 2001 Nationalbanken.
Published by Danmarks Nationalbank March 2001, http://www.nationalbanken.dk