The Domestic Financial System
The earnings of the Danish banks remain stable with losses and provisions at a low level. Overall, the banks have stood firm against the downturn in the financial markets.
Gross new lending by mortgage-credit institutes is at an unchanged level. There is still strong interest in adjustable-rate loans.
The negative development in the stock markets has contributed to significant growth in the assets of bond funds, at the expense of equity funds.
The lower stock prices have significantly reduced the reserves of pension funds. The declining level of interest rates has made the need for further provisions more apparent.
Preparations continue for a structural reform of legislation in relation to financial enterprises, which is to result in a combined act on banks, insurancecompanies, mortgage-credit institutes and investment companies, etc.
The banks
In 2002 the banks presented sound surpluses at the level of the results in recent years. The total profit after tax amounted to kr. 14.4 billion.
The low money-market interest rate meant both low income from interest and low interest expenditure. Total net income from interest was unchanged in 2002 compared to 2001. For the first time since 1995 growth in deposits exceeded growth in lending. However, overall there was still a deposit deficit. The development in net income from interest in 2002 reflects diverging effects from the underlying components. The banks succeeded in augmenting their interest margin vis-à-vis business customers, which indicates an improved trade-off between price and risk. On the other hand, the interest margin vis-à-vis households was reduced, reflecting lower demand for bank loans. This was partly related to the fact that many private customers took out mortgage-credit loans to service ordinary bank debt.
Net income from fees and commission, which is an increasingly important source of revenue for the banks, decreased by 2.9 per cent in 2002 compared to 2001. There was lower fee income from securities trading, etc., while e.g. fee income from conversions of mortgage-credit loans increased.
Capital gains on bonds and foreign exchange offset capital losses on stocks, but total value adjustments were lower than in 2001.
Experienceshowsthatperiodsofhigh growth in lending are succeeded by periods with increased losses and provisions. In spite of the cyclical downturn losses and provisions as a ratio of loans and guarantees were by and large unchanged at 0.3 per cent in 2002, and the level was thus still very low, cf. Chart 23.
The return on equity post tax was 11.8 per cent in 2002, which is slightly below the return of 12.4 per cent achieved in 2001.
In May 2002 Danmarks Nationalbank issued its first separate annual publication on financial stability. The next financial stability report is due in mid-May 2003.
The mortgage-credit institutes
The total profit after tax of the mortgage-credit sector was kr. 5 billion in 2002, which is unchanged from 2001. Gross new lending by the mortgage-credit sector amounted to kr. 332 billion in 2002, compared to kr. 334 billion in 2001. Conversion activity was still high in 2002. Net new lending increased by kr. 11 billion to kr. 85 billion. Among other things, the increase reflected an increasing tendency for households to raise mortgage-credit loans, partly to replace bank loans.
During 2002 adjustable-rate loans totalling kr. 149 billion were issued, equivalent to 45 per cent of total new lending, cf. Chart 24. The figure for 2001 was 50 per cent. The interest in new loans granted in euro declined marginally during the year.
| Mortgage-credit institutes' gross new lending by loan types |
Chart 24
|
 |
|
| Source: The Association of Danish Mortgage Banks. | |
The investment associations
At the end of 2002 investment associations managed assets totalling kr. 285 billion, distributed on 20 investment associations with 484 funds.
Investment certificates mainly attract private customers, who accounted for a share of 56 per cent at the end of 2002. The second largest group, insurance and pension companies, held 27 per cent, while foreign investors held 3 per cent.
Total assets placed in investment certificates in 2002 were at around the same level as in 2001, since bond funds made ground at the expense of equity funds, cf. Chart 25. The assets of the bond funds rose to kr. 190 billion, primarily via an influx of new assets. At the same time, the assets of the equity funds fell to kr. 81 billion. Bond funds thus now accounted for two thirds of the total assets, compared to around half at the end of 2001. The shift reflects the major drop in stock prices, as well as portfolio restructuring. As their assets declined, a number of investment funds fell below the statutory requirement of assets totalling at least kr. 10 billion. The problems were, however, concentrated in a few small, specialised funds. Against the background of the decrease in assets, some investment funds have closed or have been obliged to merge.
Insurance and pensions
The option to present market-value based accounts as from 1 January 2002 means that life-insurance companies and professional pension funds can include part of their life insurance provisions as reserves against losses.
The reserves of the life-insurance companies and professional pension funds were reduced significantly in 2002 as a result of the sustained drop in stock prices. The declining level of interest rates has made the need for further provisions more apparent. Over the summer of 2002 a number of pension companies[1] indicated that they had problems passing the stress tests applied by the Danish Financial Supervisory Authority to assess the robustness of pension companies. The switch to market-value-based accounts has, however, remedied the situation for some of the companies.
The bond market
The total outstanding volume of listed krone-denominated bonds was kr. 2,165 billion at the end of 2002, which was an increase of 4 per cent on 2001, cf. Table 5. The development reflects e.g. rising house prices, which contributed to increasing the volume of outstanding mortgage-credit bonds. At the same time the government had a higher borrowing requirement, e.g. as a result of re-lending to government-guaranteed entities.
|
Table 5 |
|||
| Kr. billion, nominal value, end-December |
2001
|
2002
|
|
| Government bonds |
616
|
641
|
|
| Mortgage-credit bonds |
1,353
|
1,422
|
|
| Other bonds |
112
|
102
|
|
| Total |
2,081
|
2,165
|
|
| Note: The figure is affected by refinancing activity, since both old and new mortgage-credit bonds are included in the calculation of the outstanding volume. In December 2002, the value of refinanced mortgage-credit bonds was kr. 158 billion, of which the largest proportion was issued in Danish kroner. Source: Danmarks Nationalbank. |
|||
In 2002 mortgage-credit bonds for kr. 206.5 billion were redeemed prematurely, which was a reduction by kr. 12 billion on the previous year, cf. Chart 26.
On 27 September 2002 the minimum coupon rate was lowered extraordinarily from 4 per cent to 3 per cent for the period 10 October to 31 December. The minimum coupon rate for the 1st half of 2003 remains 3 per cent.
The development in interest rates in the Danish bond market is described on p. 44.
Statutory framework for the financial sector
Status of new capital-adequacy rules
Since 1999 the Basel Committee has been preparing new capital-adequacy rules for banks, among other things with a view to bringing the capital requirements more in line with financial innovation and modern risk-management techniques.
From October to December 2002 the Basel Committee conducted a quantitative survey of the consequences of the preliminary recommendations in relation to the banks' capital requirements. A number of Danish banks were invited to participate in the survey. The results of the survey are key input to the third consultative document, which the Basel Committee plans to publish in the 1st half of 2003.
In parallel with the Basel Committee's work the EU is preparing a new Directive on capital requirements for credit institutions. The Directive is expected to be submitted shortly after the publication of the Basel Committee's third consultative document. The new capital-adequacy rules are expected to come into force at the end of 2006.
Financial Business Act – a structural reform
The legislation in relation to financial enterprises is being revised against the background of the recommendations of the Committee on the Financial Sector after the Year 2000, cf. p. 148.ff.
The structural reform is aimed at compiling uniform provisions in the acts on banks, insurance companies, mortgage-credit institutes and investment companies, etc. into one single act. Special provisions will, however, be maintained to some extent. The first part of the structural reform was introduced in June 2001, followed by changes in May 2002. The second part of the structural reform was commenced in the autumn of 2002 with a view to introducing a bill in the Folketing (Parliament) in the spring of 2003.
The current proposal involves the full repeal of the Act on Danish Commercial Banks and Savings Banks, the Act on Insurance Companies, the Act on Investment Companies, the Electronic Money Institutions Act and the Act on Savings Enterprises. In addition, the Mortgage Credit Act and the Act on Investment Associations are to be partly repealed. It is proposed that the latter be maintained as product acts, making the products comprising mortgage-credit bonds and investment certificates subject to separate regulation from the investment associations' administration companies and the mortgage-credit institutes. With a few exceptions, the provisions relating to mortgage-credit institutes, banks and investment companies are fundamentally combined, while the provisions relating to insurance companies, pension companies and e-money institutions will be included in the act in their entirety, without any changes. Special provisions for individual areas are also maintained to a large extent. It is proposed that the licensing chapter be amended to introduce a concession system for banks and mortgage-credit institutes equivalent to the system applying in the insurance sector. In addition, it is proposed that banks no longer be granted a universal licence, but must have separate licences for securities trading and e-money activities. A task force suggests that the provisions relating to management and speculation be amended and harmonised.
The terminology used in capital-adequacy provisions should be harmonised. As a consequence, the concept of base capital will be introduced instead of liable capital, and supplementary capital will become subordinate loan capital. The minimum capital requirement will be the same for banks and mortgage-credit institutes, whereby the minimum capital requirement for mortgage-credit institutes will be lowered. The provisions relating to hybrid capital and supplementary capital (subordinate loan capital) will be amended to the effect that the supplementary provisions which were previously stated in Executive Orders are now incorporated into the Act itself. In addition, a new criterion will be introduced for writing down subordinate loan capital and hybrid core capital. This criterion was not included in the former provisions. According to the proposal, capital can either be written down as before, by subsequent injection of new capital into the institution, or, as a new option, if the institution is wound up without losses to the non-subordinate creditors.
The accounting provisions were harmonised in the first part of the joint act in accordance with international standards (IAS). A committee has been set up to review the consequences of new accounting standards and is expected to complete this task by the end of the 3rd quarter of 2003. The committee has been set up under the chairmanship of the Danish Financial Supervisory Authority, where it also has its secretariat, and includes representatives of the Danish Bankers Association, the Association of Danish Mortgage Banks, Danmarks Nationalbank and the Institute of State Authorised Public Accountants in Denmark. The committee has a mandate to assess how the valuation of credit institutions' lending is affected by the transition to new accounting principles, and how this can be measured in practice. It is to be assessed how a sound transition to the new principles can be ensured, including whether changes in the valuation methods require changes in the capital requirements for the credit institutions.
VB Finans, Himmerlandsbanken and C&G Banken
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.
In connection with the hearing of two cases against the estate, negotiations for a settlement were initiated in the autumn of 2001, and in December 2001 the parties arrived at an amicable settlement, cf. the 2001 Annual Report, p. 60. At the beginning of 2002 the conditions of the settlement were met, and on 4 April 2002 the first instalment of the dividend to the subordinate capital was paid, viz. 30 per cent. The settlement comprises a further dividend of at least 7 per cent, payable on 1 April 2003.
After the settlement, the estate could be finally wound up, since Danmarks Nationalbank has taken over the risk for the remaining settlement.
In connection with the winding up of the estate, the government guarantee for the overdraft of kr. 4.4 billion was released, and the estate released the guarantee of kr. 750 million, for which Danmarks Nationalbank was liable before other guarantors for the first kr. 250 million. Neither the government nor the other guarantee consortium participants were thus required to contribute financially to the final winding-up of Varde Bank.
The winding-up of the activities after Varde Bank continued throughout 2002, and at the close of the year only a few exposures and properties remained.
Himmerlandsbanken
Together with a number of banks (the Guarantee Consortium) Danmarks Nationalbank provided a guarantee of maximum kr. 150 million in connection with Himmerlands-banken's winding-up in August 1993. The purpose of the guarantee was to cover certain concrete exposures that were not taken over by Spar Nord in connection with its assumption of most of the assets and liabilities from Himmerlandsbanken, and also to cover unbooked guarantees or compensation claims on the Himmerlandsbanken winding-up estate. On the other hand, the purpose of the guarantee was not to cover share capital or subordinate capital. In addition to the maximum guarantee Danmarks Nationalbank provided an unlimited guarantee for unbooked commitments beyond the aforementioned guarantee. Claims accepted as simple claims on the winding-up estate will be subject to the guarantees of the Guarantee Consortium or Danmarks Nationalbank.
In March 2001 the winding-up estate lost the "bond case" (Himmerlandsbanken's issue of bonds as subordinate capital) at the court of Hobro, and this ruling was upheld before the Western Division of the Danish High Court in September 2002. The ruling ordered the estate to acknowledge that the capital originally subscribed as subordinate capital was to be recognised as a simple claim on the winding-up estate.
After consultation with the Guarantee Consortium, in November 2002 the winding-up estate applied to Procesbevillingsnævnet (litigation approval board) for permission to bring the case before the Supreme Court. Supplementary capital, together with a bank's share capital and reserves, is used to fulfil the statutory capital requirement. It is important that, as intended by legislation, the supplementary capital can help to cover losses in any future banking crises, and thereby create the greatest possible security for depositors. The grounds for the ruling by the Western Division of the Danish High Court limit the possibility of using the supplementary capital as intended. At the time of going to press no decision has been presented by Procesbevillingsnævnet.
Settlement of the winding-up estate awaits the final settlement of the above case as well as the settlement of the estate's asset-stripping cases. It is expected that the loss to be covered under the given guarantees can be covered within the guarantee of the Guarantee Consortium.
C&G Banken
C&G Banken filed for suspension of payments on 28 October 1987. As described on p. 46 of the 1988 Annual Report, in the months after the suspension of payments the trustees of the estate subject to suspension of payments made great efforts to achieve a dissolution of C&G Banken without filing for bankruptcy. Danmarks Nationalbank had indicated to the trustees that it would reserve its position and consider the winding-up plan when negotiations with the other creditors had been concluded. Since the trustees did not manage to reach an agreement with these creditors, C&G Banken was declared bankrupt on 17 May 1988. Danmarks Nationalbank's claim on the estate, including interest up to and including the date of bankruptcy, was kr. 387.6 million.
The estate of C&G Banken was wound up in 2002. The final statement of receipts and payments incidental to the bankruptcy, which was confirmed at a meeting of creditors on 21 January 2002, resulted in a total dividend to unsecured creditors of 52.50924 per cent, of which 30 per cent was distributed on account in November 1995. The remaining dividend of 22.50924 per cent was paid out on 20 February 2002. Danmarks Nationalbank's losses, excluding interest from the date of bankruptcy, were thus kr. 184.1 million.
In the Annual Accounts for 1987 Danmarks Nationalbank allocated a provision of kr. 369 million, equivalent to the loan to C&G Banken. Danmarks Nationalbank has received dividend totalling kr. 203.5 million, of which kr. 87.2 million is recognised as income in the Annual Accounts for 2002.
15 minor cases have been deferred until after the winding-up of the estate. When these cases have been concluded, the estate will be resumed with a view to presenting accounts for these deferred elements.