The Domestic Financial System^[1]

The banks' profits continued to increase in 2006, in view of the considerable growth in lending and very low losses.

The underlying earnings of the mortgage-credit institutes generally decreased in 2006, primarily as a result of lower remortgaging activity compared to the very high level in 2005. Their earnings reflect a normalisation of the level of activity in the mortgage-credit market.

In 2006 the total assets managed by the investment associations continued to increase due to such factors as rising equity prices and a resulting increase in the assets of the equity funds.

The Minister for Economic and Business Affairs has submitted a bill on covered bonds for consultation. The objective is to give banks access to issue covered bonds and to allow mortgage-credit institutes and Danish Ship Finance A/S to continue to issue covered bonds.

BANKS

The banks' profits rose again in 2006, in some cases significantly. The banks' earnings increased as a consequence of continued strong growth in lending and higher revenue from securities transactions. At the same time, losses were still low.

The banks' lending to residents totalled kr. 1,299 billion at the end of 2006, compared to kr. 1,095 billion at end-2005. The growth in lending is driven by the favourable economic conditions, combined with interest rates that have increased a little, but are still low. The strong growth in the banks' lending to households in recent years is to a large extent attributable to loans against real property as collateral, including the banks' mortgage loans, i.e. loans that are subject to relatively low risk, cf. Chart 21. The banks' costs rose due to investments in expansion and adjustment of branch networks, as well as staff increases in response to a higher level of activity.

Again in 2006 the banks carried net value impairments as income.

MORTGAGE-CREDIT INSTITUTES

The underlying earnings of the mortgage-credit institutes generally decreased in 2006, primarily as a result of lower remortgaging activity compared to the very high level in 2005. 

Total lending to residents by mortgage-credit institutes amounted to kr. 1,833 billion at end-2006, against kr. 1,663 billion at end-2005.

Adjustable-rate loans accounted for 48 per cent of mortgage-credit lending at end-2006, against 49 per cent at end-2005, cf. Table 5. Loans with a fixed-interest period of up to and including one year still make up by far the largest share, at 73 per cent, of adjustable-rate loans.

The increase in the share of deferred-amortisation loans continued in 2006, bringing these loans as a ratio of total mortgage-credit lending to residents to 33 per cent at end-2006, compared to 26 per cent at end-2005.

INVESTMENT ASSOCIATIONS

The total assets managed by the investment associations continued to increase in 2006. At end-2006, the investment associations had issued shares for a total of kr. 918 billion, compared to kr. 790 billion at end-2005. The increase in the total assets is primarily attributable to the growth in equity funds, against the background of the favourable development in the equity market. At end-2006, 42 per cent of the assets managed by investment associations were placed in shares, while 44 per cent were placed in bonds, compared to 36 per cent in shares and 50 per cent in bonds in 2005, cf. Chart 22.

Private investors' share of investment certificates issued declined marginally to 32 per cent at end-2006 from 34 per cent at end-2005. The share held by insurance and pension companies rose from 30 per cent to 32 per cent. Apart from private investors and insurance and pension companies, issued investment certificates are primarily held by other financial intermediaries and financial auxiliaries, including investment associations. At the end of 2006 this group accounted for 21 per cent.

THE BOND MARKET

The total volume of outstanding listed krone-denominated bonds was kr. 2,797 billion at end-2006, representing an increase by 2 per cent on 2005, cf. Table 6. The volume of outstanding government bonds fell by kr. 56 billion, while the volume of mortgage-credit bonds rose by kr. 96 billion.

In 2006, premature redemptions of Danish mortgage-credit bonds amounted to kr. 270 billion, representing a significant decline from the record-high level of kr. 543 billion in 2005, cf. Chart 23. Bond yields rose slightly in 2006 from a low level. With effect from 1 July 2006, the minimum coupon rate was raised from 2 per cent to 3 per cent, and is held at 3 per cent in the 1st half of 2007.

Trading in Danish government securities
Danish government securities are traded via electronic trading platforms with various types of price quotation, and in the OTC market. A large part of the electronic trading in Danish government securities takes place on the electronic trading platform MTSDenmark.

In 2006, average daily turnover on MTSDenmark was kr. 1.4 billion. Besides MTSDenmark, Danish government securities are traded on other electronic trading platforms such as ICAP, TradeWeb, BloombergBondtrader, Reuters and BondVision. In addition, a price-quoting scheme has been established on the Copenhagen Stock Exchange. This gives small investors access to a transparent and efficient market for trading in Danish government bonds.

Covered bonds
On 6 December 2006, the Minister for Economic and Business Affairs submitted a bill on covered bonds for consultation. The objective of the statutory amendment is to give banks access to issue covered bonds and to allow mortgage-credit institutes and Danish Ship Finance A/S to continue to issue covered bonds. The Act is expected to enter into force on 1 July 2007. Reference is made to the review of recent economic and monetary trends in Danmarks Nationalbank's Monetary Review, 1st Quarter 2007.^[2]

BUSINESS CONTINUATION

Danmarks Nationalbank chairs a working group whose mandate is to ensure coordination of the business continuation plans of financial institutions in the event of dramatic external events, e.g. terrorist attacks, the outbreak of epidemics, natural disasters or similar, that can jeopardise the financial system. The working group was established in 2006 and comprises representatives from the Danish Financial Supervisory Authority, the Danish Bankers Association and the Association of Danish Mortgage Banks. The responsibility for ensuring that the necessary contingency plans and emergency procedures are in place lies with the board and management of each financial enterprise.

REPORT ON THE STOCK MARKET IN A GLOBALISATION CONTEXT

The Ministry of Economic and Business Affairs and Danmarks Nationalbank jointly prepared the report The Stock Market in a Globalisation Context^[3] (in Danish), which was published in August 2006. The report presents an analysis of the Danish stock market and its infrastructure in the light of recent years' increasing integration of the European securities markets. Furthermore, the work at European level to enhance the efficiency of the stock markets and promote cross-border trading is described. The report also reviews a number of potential future scenarios for the Danish securities infrastructure.