The Domestic
Financial System
The banks increased their profits substantially in 2004, inter alia due to increased income from fees and commission as well as a continued reduction of losses and provisions.
The earnings of the mortgage-credit institutes rose in 2004, primarily as a result of increased lending. At the end of the year the mortgage-credit institutes introduced a new product that combines an adjustable-rate mortgage-credit loan with an interest-rate ceiling applying throughout the maturity of the loan.
Rising stock prices and relatively calm market conditions meant that the pension companies were more robust at end-2004 than at the beginning of the year.
The assets of the investment associations also increased due to favourable market conditions.
The Basel Committee published the Basel II Accord in June 2004. In December 2004 the Council of Ministers for Economic Affairs and Finance reached political agreement on implementation of the Accord in the EU member states.
BANKS AND MORTGAGE-CREDIT INSTITUTES
The banks improved their total profit after tax in 2004 against 2003. Income from fees increased while net income from interest fell. Value adjustment of securities as a result of increasing stock prices and falling interest rates also contributed positively to the result for the year. The operating costs of the banks rose in 2004 as a result of higher expenditure for establishment of new branches and staff increases in the small and medium-sized banks.
The banks increased their total lending in 2004, cf. Chart 22. The growth in lending is primarily due to lending to private individuals, which is mainly related to the introduction of "mortgage" loans as an alternative to loans from mortgage-credit institutes. The banks' losses and provisions were reduced in 2004 from an already low level.
The earnings of the mortgage-credit institutes rose in 2004, primarily as a result of increased lending. The level of conversion activity in the housing market was relatively modest in the 1st half of 2004. The introduction of new types of mortgage-credit loans in the 4th quarter of 2004, cf. the next section, did, however, lead to considerable remortgaging activity – and thus higher income from fees – towards the end of the year.
The mortgage-credit institutes' total lending at end-2004 was kr. 1,590 billion, against kr. 1,502 billion at end-2003. Net new lending fell by kr. 10 billion to kr. 88 billion in 2004.
Danske Bank's acquisition of National Irish Bank and Northern Bank
On 14 December 2004, Danske Bank announced that it had concluded an agreement with National Australia Bank to acquire National Irish Bank in Eire and Northern Bank in Northern Ireland for a total price of kr. 10.4 billion. This is Danske Bank's largest acquisition since RealDanmark in 2000, and its largest outside Scandinavia.
HOME FINANCING
Home financing in Denmark increasingly takes place via adjustable-rate loans. Throughout 2004 Danish mortgage-credit institutes thus issued more adjustable-rate than fixed-rate loans, and the proportion of fixed-rate loans without deferred amortisation was less than half the total mortgage-credit lending at end-2004, cf. Table 5. The reason is that deferred-amortisation adjustable-rate loans became very popular in 2004, mainly at the expense of traditional fixed-rate mortgage-credit loans.
A number of Danish banks have entered into competition with the mortgage-credit institutes and now offer alternative types of home financing, known as mortgage loans. The products vary from bank to bank, but the basic concept is more or less the same: adjustable-rate overdraft facilities with long maturities against real property as collateral. Some banks limit the mortgageable value to 80 per cent of the property value, which is equivalent to a mortgage-credit loan, while others allow a higher loan-to-value ratio. The deferred-amortisation period granted beforehand also varies (from 10 to 25 years). The new loan types meant that the banks gained market shares from the mortgage-credit institutes in 2004.
In the autumn of 2004 the mortgage-credit institutes launched a new mortgage-credit product comprising adjustable-rate bond loans with a ceiling on the rate of interest. This ceiling applies throughout the maturity of the loan, i.e. for up to 30 years, and protects the borrower against any increases in interest rates that exceed the ceiling.
Danish homeowners thus now have a wider choice when it comes to home financing. The individual homeowner may find it difficult to understand the various loan types and the risks involved. It is therefore important to provide advice to homeowners on how their finances are affected by the various types of loans, e.g. if interest rates change.
PENSION COMPANIES
Life-insurance companies and professional pension funds, hereinafter referred to as pension companies, appeared to be more robust at end-2004 than at the beginning of the year. Rising share prices in both the USA and Europe, as well as relatively calm market conditions, enabled further consolidation of the sector after the turbulent years in 2000-02. On the basis of the financial statements presented, the pension companies' returns on investment are assessed to be positive in 2004. There are also indications that the pension companies in 2004 chose to invest more in stocks. The trend in 2003 thus seems to have continued in 2004.
At end-2004 investment associations managed total assets of kr. 572 billion, which is an increase by kr. 208 billion compared to end-2003. At the close of the year, bond funds managed almost twice as many assets as equity funds. In relative terms the equity funds grew the most, however, and at year-end 31 per cent of the assets of investment associations were placed in shares, 60 per cent in bonds and the rest in mixed funds, cf. Chart 23.
| ASSETS OF INVESTMENT ASSOCIATIONS BY FUND TYPE, YEAR-END |
Chart 23
|
 |
|
| Source: Danmarks Nationalbank. | |
Private investors still own the largest proportion of the investment certificates, but in 2004 financial corporations in particular increased their portfolios of investment certificates considerably, from an ownership share of 33 per cent at end-2003 to 48 per cent at end-2004.
The new Act on Investment Associations, etc., which came into force on 1 January 2004, provided for limited-membership associations.[1]At end-2004 limited-membership associations managed almost a quarter of the total assets.
New legislation on hedge associations
On 15 December 2004 the Danish government presented a bill to provide a supervisory and legal basis for establishing hedge associations in Denmark. Hedge associations will be the Danish equivalent of hedge funds. The bill does not envisage limitations to the investment strategy and risk profile of hedge associations. The public must be able to familiarise itself with these via an association's statutes and prospectus. For a more detailed description, see The Statutory Basis for the Financial Sector, p. 162.
THE BOND MARKET
The total outstanding volume of listed krone-denominated bonds was kr. 2,552 billion at end-2004, which was an increase by 10 per cent on 2003, cf. Table 6. This development primarily reflects growing indebtedness among Danish homeowners. The outstanding volume of government bonds thus remained virtually unchanged, while the outstanding volume of mortgage-credit bonds increased by kr. 223 billion.
In 2004, premature redemptions of Danish mortgage-credit bonds totalled kr. 310 billion, which was a reduction by kr. 61 billion from the previous year. This reduction should be viewed against the background of a more or less unchanged level of interest rates. All other things being equal, this makes remortgaging less attractive, cf. Chart 24. However, the introduction of new mortgage-credit products stimulated conversion activity towards the end of the year. The minimum coupon rate remained unchanged at 3 per cent throughout 2004.
Trading in Danish government bonds
Since November 2003 Danish government bonds have been issued and traded on the electronic trading platform on MTSDk. In 2004 the average daily turnover on MTSDk was kr. 2.5 billion.
Danish government bonds are also traded on a number of international electronic trading platforms. When trading on electronic platforms, investors are always able to trade government bonds at the current market price. At the same time investors in Danish government bonds have access to better pre-trade information throughout the trading day. This has increased the transparency in the market. Moreover, Danish government bonds are traded on the Copenhagen Stock Exchange, where a number of banks have concluded an agreement with Danmarks Nationalbank to quote two-way prices on an ongoing basis on a sub-segment for government securities.
ACQUISITION OF THE COPENHAGEN STOCK EXCHANGE BY OMX
On 15 November 2004, the Copenhagen Stock Exchange and Swedish OMX, which owns the stock exchanges in Stockholm, Helsinki, Tallinn, Riga and Vilnius, announced that they had signed a Letter of Intent regarding a combination of the Copenhagen Stock Exchange and OMX. On 1 December this was followed by a press release stating that a Combination Agreement had been signed. OXM has bought all outstanding shares in the Copenhagen Stock Exchange.
After the combination the Copenhagen Stock Exchange will still be domiciled in Denmark and subject to Danish regulation and supervision.
FRAMEWORK FOR THE FINANCIAL SECTOR
The new role and composition of the Danish Securities Council
As from 1 January 2005 the composition and tasks of the Danish Securities Council have changed in connection with an amendment of the Securities Trading Act.
Among other things, the Securities Council is empowered to make decisions on issues of a fundamental nature or of major importance to players in the securities market. In addition, the Securities Council is an overall, independent authority in relation to control of financial information in financial statements and interim financial statements. The powers of the Securities Council to issue rules have, however, been abolished.
The Securities Council has been enlarged from 12 to 14 members, of which seven representatives are independent of the financial sector, while seven are members with a professional interest in the securities market. For a more detailed description, see The Statutory Basis for the Financial Sector, p. 157-159.
New capital-adequacy rules (Basel II)
In June 2004, the Basel Committee published its new recommendations for the capital requirements to be imposed on credit institutions by supervisory authorities, known as the Basel II Accord. Basel II is a further development of the existing Basel capital-adequacy rules (Basel I), which are observed in more than 100 countries worldwide. The objective of the new Basel II Accord is that the capital requirement should better reflect the risks incurred by the individual institutions. In December 2004 the Council of Ministers for Economic Affairs and Finance, the Ecofin Council, reached political agreement on implementation of Basel II in the EU. The rules are expected to come into force in member states at the end of 2006, but credit institutions will be able to apply the existing capital-adequacy rules until the end of 2007. However, credit institutions using the most advanced methods for calculation of their minimum capital requirement cannot apply the new rules until the beginning of 2008. The content of Basel II is described in more detail in The Statutory Basis for the Financial Sector, p. 156.
Amendment of the Financial Business Act following new international accounting standards (IAS)
With effect from 1 January 2005, the Financial Business Act was amended in relation to both accounts and capital adequacy. This implements the EU regulation on the application of international accounting standards, the IAS regulation, and the new IAS-compatible accounting rules come into force, cf. The Statutory Basis for the Financial Sector. Under the regulation, enterprises issuing securities in regulated markets within the EU must apply the international accounting standards issued by the International Accounting Standards Board (IASB) and approved by the EU to their consolidated accounts.
Under the Financial Business Act, credit institutions in Denmark that are not directly governed by the regulation can choose to apply the IAS as the statutory basis for the presentation of their accounts.
The new accounting standards mean that the provision practice applied so far, i.e. the prudent accounting principle, where losses are recognised when they are imminent and gains when they are realised, no longer applies. Under the IAS and the new accounting rules losses must be recognised when there is a clear indication of a decrease in value, i.e. a neutrality principle. The new provision practice means that banks will be able to reverse previous provisions.
To ensure an adequate buffer, also after the new accounting rules have come into force, a supplement to the existing solvency rules has been introduced, inspired by Basel II. The board and management of each credit institution must thus determine their individual solvency requirements, taking into account the effect of the new accounting rules. Under the Act, the institutions are not required to publish their solvency requirement.
The new accounting rules under certain conditions make it possible to classify securities by the original acquisition purpose and in certain cases to state them at cost price. The existing practice does not distinguish between the various purposes for which securities are held, and the securities are normally stated at fair value. Securities in trading portfolios must be stated at fair value.
In future mortgage-credit institutes must state mortgage-credit lending and issued mortgage-credit bonds at fair value.
New EU rules on investor protection and transparency in the securities market
The new EU directive on markets in financial instruments, the MiFID, entered into force on 30 April 2004 and must be transposed into national legislation in the member states within two years from this date. Implementation of the MiFID will entail changes to both the Securities Trading Act and the rules on good securities trading practices. The MiFID harmonises EU rules on e.g. authorisation of securities dealers, investor protection and transparency in the securities market.
The work to prepare the implementing measures has proved to be more extensive and time-consuming than originally assumed and consequently the two-year deadline is expected to be extended.
The Financial Services Action Plan and the Lamfalussy procedure
The Financial Services Action Plan, FSAP[2], has by and large been implemented as planned, and in the spring of 2004 the European Commission set up four expert groups on banking, insurance and pensions, securities and asset management to assess the plan. The objective of the plan was to remove the remaining legislative and regulatory barriers to a single financial market in the EU. To ensure consistent implementation of the FSAP and the future rules within the financial area, a number of supervisory committees have been created to monitor the process and advise the European Commission.
Supervisory committees have been set up for insurance and pensions (the Committee of European Insurance and Occupational Pensions Supervisors), securities (the Committee of European Securities Regulators) and banking (the Committee of European Banking Supervisors, CEBS). The CEBS commenced its work in 2004. CEBS participants include not only supervisory authorities, but also central banks without supervisory responsibilities, including Danmarks Nationalbank.
VB FINANS AND HIMMERLANDSBANKEN
VB Finans
In connection with the final winding-up of the estate of VB Finans in 2002, Danmarks Nationalbank took over the risk for the remaining settlement, cf. the Report and Accounts 2002, p. 56. The winding up of the activities of Varde Bank is now so far advanced that Danmarks Nationalbank in 2004 was able to transfer back kr. 67 million of the provision previously made for this commitment. At the end of 2004 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 (the Board of Appeal) the ruling was appealed to the Supreme Court in April 2003. The case will be heard by the Danish Supreme Court in the period 7-11 March 2005. A ruling is expected to be passed immediately thereafter.
[1] Limited-membership associations may not receive funds from the general public and are thus mainly meant for large investors such as insurance companies and pension funds. Limited-membership associations are to replace special associations with few members. It is voluntary for limited-membership associations to be subject to supervision.
[2] Cf. article by Dorte Kurek, Danmarks Nationalbank, Monetary Review, 1st Quarter 2004 for a more detailed description of the Financial Services Action Plan.