The Domestic Financial System
The banks presented sound surpluses in 2003, boosted by increasing net income from interest and fees, and capital gains.
At kr. 512 billion, gross new lending by mortgage-credit institutes was very high in 2003, partly as a result of significant conversion activity. Adjustable-rate loans accounted for 36 per cent of the total volume of outstanding mortgage-credit loans at end-2003.
The assets of the investment associations increased, particularly in the bond funds, which saw considerable capital gains. The equity funds reversed the negative trend.
Tradingin Danish government bonds has moved to the electronic trading platform MTS, where most other EU government bonds are also traded.
The banks
The banks presented sound surpluses in 2003 as a result of higher net income from interest and fees, as well as capital gains. The total result after tax increased by 37 per cent on 2002. Net income from interest rose by 4 percent in 2003 compared with 2002, while net income from fees and commission rose by 7 per cent, inter alia as a result of reference and guarantee commission in connection with the provision of mortgage-credit loans, as well as remortgaging fees on conversion of mortgage-credit loans.
Value adjustments were relatively large in 2003. This is especially attributable to the general upswing in the stock markets, which had seen capital losses in 2002, but yielded capital gains in 2003. Other underlying factors are the sale of Totalkredit, and the fact that unlisted securities are booked at market value as from 1 January 2003.
The operating expenses of the banks increased by 2 per cent in 2003.
Losses and provisions increased, albeit from a low level. Losses and provision as a percentage of lending and guarantees were 0.4 per cent in 2003, against 0.3 per cent in 2002. Operating income over operating expenses rose from 1.6 in 2002 to 1.7 in 2003. The banks' deposit deficit fell in 2003 since deposits increased more than lending, cf. Chart 21.
The mortgage-credit institutes
The total result after tax of the mortgage-credit sector improved in 2003, compared to 2002. The improved result is attributable to significant conversion activity and continued high growth in lending, cf. Chart 21. Gross new lending by the mortgage-credit institutes amounted to kr. 512 billion in 2003,which is higher than the previous record-high level of kr. 361 billion in 1998. Net new lending increased by kr. 11 billion to kr. 98 billion. The mortgage-credit institutes' outstanding volume of fixed-rate loans, including index-linked loans, declined by kr. 26 billion to kr. 894 billion in 2003, cf. Table 4. The volume of outstanding adjustable-rate loans grew by kr. 133 billion to kr. 498 billion in 2003 and accounted for 36 per cent of total outstanding mortgage-credit lending at end-2003.
Deferred-amortisation loans
As of 1 October 2003 mortgage-credit institutes have been allowed to offer mortgage-credit loans with deferred amortisation for up to 10 years for financing of owner-occupied housing and summer cottages. Deferred-amortisation loans can be fixed-rate or adjustable-rate loans. Adjustable-rate deferred-amortisation loans are financed via the existing adjustable-rate bonds, whereas the mortgage-credit institutes have introduced new bond series for financing of fixed-rate deferred-amortisation loans. The deferred-amortisation period can be exploited fully or partially throughout the loan term. In the 4th quarter of 2003 deferred-amortisation loans totalling kr. 44.4 billion were issued for owner-occupied housing and summer cottages. These loans accounted for 39 per cent of gross new lending in the 4th quarter of 2003. Most deferred-amortisation loans were adjustable-rate loans.
Nykredit's acquisition of Totalkredit
In June 2003 Nykredit and Totalkredit announced that Nykredit would acquire Totalkredit and that they would enter into mutually binding long-term cooperation on extension of mortgage-credit loans with the 106 local and regional banks behind Totalkredit. In November 2003 Nykredit's purchase of Totalkredit was effected at a total price of kr. 7.15 billion. Nykredit initially acquired 51.8 per cent of the share capital in Totalkredit A/S. Nykredit has an option to acquire a further 18.7 per cent in 2004 and 29.5 per cent in 2006.
Totalkredit will continue as a subsidiary of Nykredit Realkredit. The acquisition of Totalkredit makes the Nykredit group the largest provider of mortgage-credit loans in the Danish market. The transaction entailed a significant capital injection to the small banks behind Totalkredit.
The investment associations
At end-2003 the investment associations managed assets totalling kr. 364 billion, an increase by kr. 79.9 billion compared with end-2002. Of the increase, kr. 58.4 billion can be attributed to net payments from households and insurance and pension companies, which own 52 per cent and 31 per cent, respectively, of the assets. The bond funds saw the greatest increase inassets, kr. 59.1 billion, due to considerable capital gains, as well as an inflow of funds of kr. 53.1 billion. Overall, 68 per cent of the investment-association assets are placed in bond funds. In 2001 there was an equal distribution between equity and bond funds, cf. Chart 22. After a significant fall in 2002, equity funds grew marginally in 2003, by kr. 19 billion, reflecting capital gains and a net inflow of funds totalling kr. 6.7 billion.
| Assets of investment associations by fund type, year-end |
Chart 22
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| Source: Danmarks Nationalbank. | |
The bond market
The total outstanding volume of listed krone-denominated bonds was kr. 2,327 billion at end-2003, which was an increase by kr. 124 billion on 2002, cf. Table 5. The volume of outstanding government bonds fell by kr. 15 billion to kr. 628 billion, whereas the volume of outstanding mortgage-credit bonds increased as a result of higher house prices and a higher loan-to-value ratio.
In 2003 mortgage-credit bonds for kr. 371.5 billion were redeemed prematurely, which was an increase by kr. 165 billion on the previous year. The increase in premature redemptions is attributable to falling interest rates, cf. Chart 23. Bond yields reached a low in 2003, cf. p. 44, and the minimum coupon rate was reduced from 3 per cent in the 1st half to 2 per cent in the 2nd half of 2003. The minimum coupon rate for the 1st half of 2004 is 3 per cent.
Trading in Danish government bonds
On 4 November 2003 trading opened on the wholesale market, i.e. the interdealer market, for Danish government securities on the electronic trading platform MTS. Whereas most trades were formerly effected by telephone, Danish government securities are now traded electronically on the same platform as the government securities from most other EU member states.
In connection with the switch to electronic trading, a primary dealer scheme was established. A number of banks – the primary dealers – have concluded an agreement with Government Debt Management at Danmarks Nationalbank under which the banks have an obligation to currently quote bid and ask prices within predefined spreads and amounts. Modernisation of the Danish market for government securities was required if the Danish market is to keep up with foreign markets. On 1 December 2003 it also became possible for private individuals and small investors to place orders and trade in an electronic market. Under an agreement with Government Debt Management at Danmarks Nationalbank a number of banks have committed themselves to currently quoting bid and ask prices on a special electronic trading platform at the Copenhagen Stock Exchange.
Insurance and pensions
The Danish pension system comprises a number of different pension schemes, generally with limited choice. The government wishes to give the individual policyholder greater influence on the placement and management of his or her pension savings. This applies to the statutory schemes, LD (the Employees' Capital Pension Fund) and ATP (the Labour Market Supplementary Pension Fund), as well as labour-market pensions. On 21 May 2003 the report "Greater Choice for Pension Savers" (in Danish) was issued. The report deals with increased choice and better options to transfer to another individual pension scheme, individualisation of bonuses, guaranteed interest rates and information in the pension sector. The report's recommendations form the basis for the government's further work.
As the report states, a basic problem in relation to guarantees issued by pension companies is the discrepancy between the duration of the obligations and the duration of the assets. The guarantees are a problem for policyholders and pension companies alike. Supervisory authorities and pension funds, however, only have limited scope for changing contractual guarantees already made. An adjustment of the guarantee system to make it more robust to changes in the economic conditions would be expedient.
Framework for the financial sector
New decision-making process in the financial area within the EU
At the turn of the year 2003 the Ecofin Council agreed to extend the Lamfalussy procedure to include all financial sectors. The Lamfalussy procedure, which was originally introduced for securities, enables more efficient regulation in order to keep up with the rapid pace of development in the financial area. In future, the Ecofin Council and the European Parliament will only adopt the key statutory principles (level 1), while the technical implementation measures will be left to the European Commission, assisted by regulatory committees (level 2) comprising representatives of national government ministries. In addition, supervisory committees will be set up to advise the European Commission and the regulatory committees on supervisory issues and to ensure uniform implementation of the rules, among other things. Members of the supervisory committees will be representatives of the supervisory authorities and in the banking committee also national central banks without supervisory responsibilities, including Danmarks Nationalbank.
Act on Certain Means of Payment
The Act on Certain Means of Payment, including e.g. rules on payment cards, was amended in June 2003. The amendments mainly relate to regulation of the banks' options to charge fees to payees, i.e. primarily retailers. Under the Act, banks may from 1 January 2005 charge fees to shops, etc. receiving payment via a chip-based Dankort (debit card). However, the first 5,000 payments per year per shop shall be exempt from fees, and any subsequent fees shall not exceed kr. 0.50 per transaction. The individual bank determines the fees charged to shops. The Act stipulates that shops may not charge higher fees to customers than they are charged themselves, and prior to payment consumers shall be informed of the size of the fee. The banks have subsequently announced that all Dankort debit cards will be chip-based by the end of 2004. Chip-based cards offer a number of advantages over the present cards. For instance, they are more difficult to counterfeit.
The work on the new capital-adequacy rules
Since 1999 the Basel Committee has been preparing new recommendations for capital-adequacy rules for large international banks, known as the Basel II Accord. At the same time, the European Commission has been preparing a draft directive on new capital-adequacy rules for all credit institutions and investment firms within the EU.
The present capital requirements for credit institutions, etc. date back to the 1988 Basel Accord. They have proved to be insufficient in a number of areas. The objective of the new Basel II Accord is that the capital requirement should to a greater extent reflect the risks incurred by the individual institution. In this connection the credit institutions may apply their own credit-risk models when determining their capital adequacy. So far capital adequacy has been based on standardised requirements. Moreover, Basel II aims to encourage credit institutions to optimise risk management on an ongoing basis.
It is still the responsibility of the Board of Directors and management of the individual credit institution to ensure that it has adequate capital in relation to its risks. The supervisory authorities must ensure that the credit institutions' capital base is sufficient to cover their risks, and encourage the credit institutions to optimise internal risk management and control. The supervisory authorities are thus given greater powers to evaluate the need for capital adequacy. Unlike the existing rules, under which the supervisory authorities must ensure compliance with the 8-per-cent minimum requirement, Basel II also calls for the supervisory authorities to ensure that the credit institutions' total capital adequacy is sufficient to cover all their risks. In other words, the supervisory authorities must evaluate the size of the credit institutions' buffer capital in excess of the minimum capital requirement.
In April 2003 the Basel Committee published its Third Consultative Paper, while the European Commission published the third version of the draft directive on a new capital-requirements framework in July. During the summer of 2003 the Basel Committee and the European Commission received a number of consultation responses to these documents. At the same time, quantitative impact studies were carried out to assess the impact on the credit institutions' capital requirements. On the basis of the consultation responses and quantitative impact studies the Basel Committee and the European Commission have made amendments in a number of areas. For instance, it has been suggested that the capital requirement for credit institutions applying their own credit-risk models should only be calculated on the basis of unexpected losses, not on the basis of expected and unexpected losses as previously proposed.
The final recommendations for the new capital requirements are expected to be published in mid-2004 and to come into force in 2007.
Cooperation between central banks and supervisory authorities in the EU
Effective 1 March 2003 central banks and supervisory authorities within the EU have prepared a Memorandum of Understanding (MoU) on exchange of information in the event of a banking crisis. The purpose of this multilateral MoU is to ensure cooperation and exchange of information between supervisory authorities and central banks in the EU in the initial phases of a cross-border financial crisis.
Memorandum of understanding between nordic central banks on financial crisis management
At a meeting in Stykkishólmur, Iceland, on 11 June 2003 the central banks of Denmark, Finland, Iceland, Norway and Sweden signed a Memorandum of Understanding (MoU) on financial crisis management. The MoU is applicable when a crisis occurs in a bank which is domiciled in a Nordic country and has at least one subsidiary in another Nordic country. However, the MoU is not applicable if the bank in question is represented in other Nordic countries via branches.
The focus of the Nordic MoU is on practical arrangements. It states that any central bank may call for a meeting of a crisis management group comprising representatives of all the central banks. Furthermore, it indicates which central bank should take the leading role and outlines the contacts that need to be made with national supervisory authorities, government ministries, bank managements and other parties. The MoU also specifies which information should be obtained and analysed from the bank concerned. The memorandum can be found at www.nationalbanken.dk.
VB Finans and Himmerlandsbanken
VB Finans
In connection with the winding up of the estate of VB Finans in 2002, Danmarks Nationalbank took over the risk for the remaining settlement. In that connection the subordinate capital was ensured dividend of 30 per cent in 2002 and further dividend of at least 7 per cent in April 2003, cf. the Report and Accounts 2002, p. 56. The latter dividend, viz. 8.1451 per cent, was paid on 15 April 2003.
The winding-up of the activities after Varde Bank continued throughout 2003, and the company responsible for the winding-up, VB Finans af 1996 A/S, cf. the Report and Accounts 1996, p. 53, was finally liquidated. At year-end only a few cases were outstanding – mainly claims on estates being wound up where final distribution of dividend is pending.
Himmerlandsbanken
Together with a number of banks (the Guarantee Consortium) Danmarks Nationalbank provided a guarantee of maximum kr. 150 million in connection with Himmerlandsbanken's winding-up in August 1993. In addition to the maximum guarantee Danmarks Nationalbank provided an unlimited guarantee. The purpose of the guarantees 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 guarantees was not to cover the share capital or subordinate capital. 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 estate being wound up lost the "bond case" (Himmerlandsbanken's issue of bonds as subordinate capital) at the court of Hobro, and this ruling was upheld before the Danish Western 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 estate being wound up. With the permission of Procesbevillingsnævnet (Board of Appeal) the ruling was appealed to the Supreme Court in April 2003.
Settlement of the estate being wound up 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 guarantees given can be covered within the guarantee of the Guarantee Consortium.