Face - Index - Top/Bottom - Previous/Next

"Report and Accounts 2001"

The Domestic Financial System

 The banks continued to present sound surpluses in view of the increase in net income from interest, which is still the largest source of revenue.

The falling market interest rates in the autumn led to strong conversion activity among homeowners. Loans at adjustable interest rates now account for approximately 20 per cent of total mortgage-credit lending.

Returns in investment associations developed in line with the market. Bond funds achieved good returns, whereas the returns of equity funds were generally poor.

In connection with the adoption of the Financial Business Act it was decided to set up a Financial Business Council, which among other things is to decide on matters of principle relating to supervision.

The banks

Based on the annual accounts that had been presented at the time of going to press, it can be concluded that the banks achieved sound surpluses for the seventh consecutive year in 2001. The bank’s total result is expected to be at the level of the result for 2000.

The trend for the overall result reflected a continued increase in net income from interest. The increasing net income from interest was attributable primarily to growth in deposits and lending. For banks resident in Denmark^[12] lending increased by 11.2 per cent in 2001, while deposits rose by 5.0 per cent. Growth in lending has generally exceeded growth in deposits since the mid-1990s, cf. Chart 22.

Net income from fees and commission was lower in 2001 than in 2000. The increase in fee income from conversions of mortgage-credit loans was not sufficient to set off the decrease in fee income from e.g. securities trading.

In 2001 value adjustments were affected by capital losses on stocks, which were, however, more than offset by capital gains on bonds.

Losses and provisions rose in 2001, but from a low level. The losses and provisions for the year were still significantly below the high level in the early 1990s.

The return on net capital after tax of the banking sector in 2001 was just below the return of 13.5 per cent in 2000.

For the last two years, Danmarks Nationalbank has published a report on financial stability in the Monetary Review for the 2nd quarter. As from May 2002, this report will be issued as a separate annual publication.

The mortgage-credit institutes

The result after tax of the mortgage-credit sector rose to kr. 5.0 billion from kr. 4.6 billion in 2000. The improved result relates to an expansion of lending and a high volume of conversions. Although losses and write-offs increased in 2001, the level was still low.

Gross new lending by the mortgage-credit sector amounted to kr. 338.0 billion in 2001, against kr. 183.1 billion in 2000. There was an increase in mortgage-credit lending at adjustable inter-est rates in both Danish kroner and euro. Adjustable-rate loans accounted for almost 50 per cent of new lending in 2001, cf. Chart 23.

At the end of 2001 mortgage-credit loans at adjustable interest rates accounted for approximately 20 per cent of total mortgage-credit loans, compared to 9 per cent at year-end 2000.

Investment associations

Investment certificates still attract many investors. The nominal value of circulating investment certificates increased by 26 per cent in 2001. The investment associations' largest customer group is private Danish customers with a share of almost 54 per cent at market value, followed by Danish insurance companies and pension funds with a share of 21 per cent. Foreign investors hold approximately 4 per cent. The returns of investment associations are influenced by trends in the Danish and international financial markets.

At end-2001 the market value of the equity funds was kr. 127 billion, which is a decrease of kr. 14 billion against the previous year. The decline is attributable mainly to capital losses. The market value of the bond funds rose to kr. 140 billion from kr. 103 billion at end-2000. Bond funds account for 50 per cent of the total assets of investment associations, against 40 per cent at the end of 2000.

The investment associations manage assets totalling kr. 282 billion in 453 funds, which is an increase by 59 funds in 2001, cf. Chart 24.

New statistics

Since the 3rd quarter of 2001 Danmarks Nationalbank has published new quarterly statistics for investment associations with details of the distribution of investment certificate holders by sector.

New trading place
On 1 March 2002 the Copenhagen Stock Exchange established a new marketplace, called the XtraMarked, for unlisted investment associations. The XtraMarked is an authorised marketplace for trading in unlisted investment associations via the Stock Exchange systems in the same way as listed investment certificates are traded in the stock market.

The bond market

The outstanding volume of listed domestic krone-denominated bondswas nominal kr. 2,081 billion at the end of 2001, which is an increase by almost 7 per cent on 2000, cf. Table 5.

The larger volume of krone-denominated bonds reflects an increase in circulating mortgage-credit bonds by kr. 146 billion in nominal terms, which more than offsets the decrease in government bonds by an amount of kr. 10 billion in nominal terms. The government budget surplus has made it possible to reduce the volume of outstanding government bonds.

Table 5 Outstanding volumes of listed domestic krone-denominated bonds (nominal value)

Source:   Danmarks Nationalbank.

In 2001 mortgage-credit bonds for kr. 219 billion were redeemed prematurely. The corresponding figure for 2000 was kr. 100 billion. The increase in premature redemptions is related to the falling interest rates, cf. Chart 25.

At the end of 2001 financial institutions, insurance companies and pension funds held 54 per cent of the circulating volume of krone- denominated bonds. Of the remainder, 17 per cent is held by the households, 12 per cent by the general-government sector, and 18 per cent by non-residents.

The minimum coupon rate^[13] was lowered extraordinarily from 4 to 3 per cent as of 23 November 2001. The minimum coupon rate for the first half of 2002 is again 4 per cent. During the short period at 3 per cent, 3 per cent bonds for a nominal value of kr. 10.8 billion were issued.

The development in interest rates in the Danish bond marked is described on pp. 42-43.

Statutory framework for the financial sector

The Financial Business Council
In connection with the adoption of the Financial Business Act, cf. p. 6, it was decided to establish a Financial Business Council. The former Insurance Council is the model for the new Financial Business Council, and the remit of the Council covers most of the financial sector. The establishment of the Financial Business Council accords with the intentions of the Financial Business Act, which are to create uniform rules and decisions for the greater part of the financial sector in view of the greater integration of the financial markets, including the formation of financial conglomerates. In organisational terms, the Financial Business Council is part of the Danish Financial Supervisory Authority. It holds the following powers:

• to settle supervisory issues of a principal nature;
• to settle supervisory issues which have major consequences for financial undertakings and financial holding companies;
• to advise the Danish Financial Supervisory Authority on issuing regulations;
• to assist the Danish Financial Supervisory Authority in its information activities.

The members of the Financial Business Council are appointed by the Minister for Economic and Business Affairs. In addition to the Chairman and Vice Chairman the members of the Council represent the organisations of the financial sector, the Danish Consumer Council and Danmarks Nationalbank.

In connection with the establishment of the Financial Business Council the Insurance Council was abolished.

Box 2 Selected changes proposed by the basle committee since the publication of the second consultative document

¹     Pillar 1: minimum capital requirements; Pillar 2: the supervisory review process; and Pillar 3: market discipline. For a description of the proposal, see Suzanne Hyldahl, New Capital-Adequacy Rules for Banks, Danmarks Nationalbank, Monetary Review, 1st Quarter 2001.

Status of new capital-adequacy rules
In January 2001 the Basle Committee^[14] issued its second consultative document on the new capital requirements for banks. In parallel with the Basle Committee's work the European Commission also issued a new consultative document. The two documents have many similarities, although the Basle Committee's standards focus on large international banks, while the European Commission takes a more EU-specific approach that covers both large and small banks, other credit institutions, and investment firms. A further difference is that the Basle Committee's standards are advisory, while the rules of the European Commission will be mandatory.

In connection with the consultation process, a Danish working group was set up in early 2001, with representatives from the Financial Supervisory Authority, the Ministry of Economic Affairs, the Danish Bankers Association, the Association of Danish Mortgage Banks and Danmarks Nationalbank. The working group expressed the Danish viewpoints in a joint Danish response to the European Commission^[15]. Box 2 outlines some of the Basle Committee's proposed amendments since the publication of the second consultative document.

In the summer of 2001 the expected implementation year for the new capital-adequacy rules was changed from 2004 to 2005.

In December 2001 the Basle Committee published another revised schedule. In that connection the issue of a third consultative document was postponed from early 2002 until after a quantitative survey of the effects of the latest proposed amendments on the bank's capital requirements which is to take place in 2002. The third consultative document will be presented thereafter. The target for implementation of the new rules is still 2005.

Measures in the insurance and pension sector
Several pension funds were severely affected by the falling stock prices after the terrorist attacks on 11 September 2001, and had to implement restoration plans. The subsequent decrease in interest rates contributed to the tight economic conditions in the pension sector, which typically offers customers nominal long-term interest guarantees. A number of legislative measures during the autumn of 2001, which had already been subject to consideration before 11 September, have helped to ease the pressure on the companies. The measures include amendments to the Corporation Tax Act and the solvency order for insurance companies. In addition, the accounting rules for insurance companies have been amended so that assets and liabilities are stated at market value.

New regulations in the stock-exchange area

Executive Order on good securities trading practices (best execution)
The Danish Securities Council has issued a new Executive Order on good securities trading practices that took effect on 1 December 2001. The Executive Order specifies the code of ethics which securities dealers are obliged to observe. The purpose of the code is to ensure optimum conditions for customers in connection with securities trading. The code will thus help to enhance transparency and safeguard private investors' confidence in the market.

New Executive Order on reporting
The Danish Securities Council has issued an Executive Order on reporting of transactions in securities listed on a stock exchange, that took effect on 1 July 2001. The primary purpose of the new Executive Order on reporting is to eliminate a number of cases of double reporting of certain types of trades, and to harmonise the rules of the Copenhagen Stock Exchange with international standards. The amendment of the Executive Order on reporting creates a basis for the compilation of statistics for securities dealers' market shares in relation to the Copenhagen Stock Exchange. The Copenhagen Stock Exchange publishes market-share statistics for stock trading as from the beginning of 2002.

New rules of ethics of the Copenhagen Stock Exchange
The Copenhagen Stock Exchange amended its rules of ethics for members with effect from 1 December 2001. This amendment was among other things in response to the Danish Securities Council's Executive Order on good securities trading practices.

New rules governing listing on the Copenhagen Stock Exchange
With effect from 1 January 2002, the Copenhagen Stock Exchange has issued amended rules relating to listing, prospectuses and ongoing disclosure obligations. The amended rules widen the requirements concerning issuers' disclosure of information in a number of areas, especially with regard to stock-exchange-listed shares and investment certificates. The amendment is part of the harmonisation of the rules of the Copenhagen Stock Exchange with international standards.

New joint rules for the Norex alliance
Norex, an alliance between four Nordic stock exchanges, which are the Iceland Stock Exchange, the Copenhagen Stock Exchange, the Oslo Stock Exchange and the Stockholm Stock Exchange^[16], has adopted a new set of joint harmonised rules, the Norex Member Rules, which came into force on 1 October 2001. The new rules harmonise trading rules and membership requirements, and are a step towards the establishment of a pan-Nordic securities market.

VB Finans and Himmerlandsbanken

VB Finans
In November 1992 Danmarks Nationalbank and seven banks issued a guarantee of kr. 750 million to Varde Bank, cf. the 1992 Annual Report, p. 49, and at the end of 1993 Danmarks 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, cf. the 1993 Annual Report, p. 49.

The winding-up of Varde Bank's activities continued throughout 2001, and only a small number of exposures remained at year-end. As a result of the winding-up, VB Finans was able to pay approximately kr. 30 million to Danmarks Nationalbank in 2001.

In 2000 Danmarks Nationalbank filed two cases against the estate, both related to the preferential position of the subordinate capital in the estate. In connection with the hearing of the cases negotiations for a settlement were initiated. In December 2001 the parties arrived at an amicable settlement which entails the accelerated winding-up of the estate and thereby also earlier distribution of dividends to subordinate creditors. Provided that the settlement conditions are met in the first half of 2002, the planned final winding-up of the estate and distribution of dividends can take place. The settlement gives subordinate creditors a dividend of 37 per cent, payable in two instalments: 30 per cent in the first half of 2002, and 7 per cent on 1 April 2003.

The government-guaranteed overdraft of kr. 4.4 billion will only come into force should the Guarantee Consortium's guarantee of kr. 750 million, of which Danmarks Nationalbank is liable for the first kr. 250 million prior to the other guarantors of the Consortium, prove to be insufficient. Final implementation of the settlement will entail that Danmarks Nationalbank's total expected losses in connection with the guarantee will be within Danmarks Nationalbank’s provision of kr. 250 million. Neither the other Guarantee Consortium participants nor the government will thus be required to contribute financially to the final winding-up of Varde Bank.

Himmerlandsbanken
As stated in previous annual reports, Danmarks Nationalbank and a number of banks made available a guarantee of up to kr. 150 million in connection with the bankruptcy proceedings of Himmerlandsbanken in August 1993. The purpose of the guarantee was partly to cover certain actual exposures which were not included in the majority of Himmerlandsbanken's assets and liabilities acquired by Spar Nord, and partly to cover unbooked guarantees or claims on the Himmerlandsbanken estate. The purpose of the guarantee was not to cover share capital or subordinate capital, however. In addition to the limited guarantee, Danmarks Nationalbank provided an unlimited guarantee for unbooked liabilities. Claims recognised as unsecured claims on the estate will be covered by the guarantees of either the Guarantee Consortium or Danmarks Nationalbank.

Final settlement of the estate awaits the settlement of the cases involving illegal use of company funds reserved for the payment of company taxes (asset stripping) in the estate as well as the lawsuit filed against the estate relating to Himmerlandsbanken's issue of bonds in the form of subordinate capital. In March 2001 the court in Hobro ruled against the estate, ordering it to acknowledge that the capital originally subscribed for as subordinate capital should be acknowledged as an unsecured claim on the estate. The court upheld that it would be unreasonable to oblige the plaintiffs to acknowledge their agreements to acquire bonds. The estate has appealed the case to the High Court, which is expected to rule in the case in June 2002.

In 2001, kr. 6 million was disbursed under the Guarantee Consortium's guarantee. The total costs of the winding-up of Himmerlandsbanken cannot yet be calculated, as the asset-stripping cases and the aforementioned case have not yet been settled.

Footnotes

^[12] The main offices of Danish banks and branches and subsidiaries of foreign banks.

^[13] The minimum coupon rate determines whether a bond is "blue‑stamped". A bond is designated "blue-stamped" if the coupon rate is greater than or equal to the minimum coupon rate applying to the period in which the bond is issued.

^[14] 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, Luxembourg, the Netherlands, Spain, Sweden, Switzerland, UK and USA.

^[15] The joint response to the European Commission can be viewed at www.oem.dk (in Danish only). Danmarks Nationalbank also sent a response to the Basle Committee expressing similar viewpoints. This response is presented on p. 143.

^[16] See www.norex.com for further information about the Norex alliance.

Face - Index - Top/Bottom - Previous/Next

Version 1.0 March 2002 Nationalbanken.
Published by Danmarks Nationalbank March 2002, http://www.nationalbanken.dk/