Report on the Nationalbank's Accounts
The Nationalbank's accounts for 1999 show a profit of kr. 1,472 million. The profit from financial items was kr. 1,933 million, of which negative value adjustments, etc. were kr. 3,081 million. After the transfer of kr. 3,081 million from the Value Adjustment Reserve and allocation of kr. 1,366 million to the General Reserves the remainder of kr. 3,188 million is payable to the central government. The Nationalbank's net capital has thereby decreased by kr. 1,715 million to kr. 41,758 million in 1999.
The Nationalbank's financial risks mainly comprise market risks. The market risk is primarily related to the interest-rate sensitivity and the foreign-exchange exposure. In view of the low interest rates at the beginning of 1999 the interest-rate sensitivity was reduced. The foreign-exchange exposure consists predominantly of euro-denominated accounts. The credit risk is very moderate since the Nationalbank exclusively holds claims on counterparties with a high credit standing and to a significant extent requires the pledging of collateral.
The Nationalbank's Management of Financial Risks
The Nationalbank holds considerable financial assets and liabilities. The principal assets are foreign deposits and securities, domestic securities and loans to Danish banks. The principal liabilities are banknotes and coins in circulation, deposits and certificates of deposit, and the deposits of the central government.
The financial assets and liabilities expose the Nationalbank to various market and credit risks, which can affect its financial result.
Market risk
The market risk is the risk of the Nationalbank suffering a loss as a consequence of price fluctuations on the financial
markets, i.e. primarily due to fluctuations in interest and exchange rates.
Interest-rate sensitivity
The interest-rate sensitivity indicates the capital loss which the Nationalbank will suffer as a consequence of a change in
interest rates. For the Nationalbank, which holds significantly more fixed-rate assets than liabilities, an increase in
interest rates will impose a loss.
The Nationalbank could avoid capital losses resulting from fluctuations in interest rates by exclusively holding outstandings at floating interest rates. However, in the long term returns on fixed-rate securities are higher than on money-market placements at floating rates. Over an extended period the Nationalbank will therefore achieve a higher return by taking an interest-rate risk.
In view of the low interest rates at the beginning of 1999 the sensitivity to changes in interest rates of the Nationalbank's portfolio of domestic and foreign bonds was reduced by kr. 0.6 billion to kr. 2.8 billion, cf. Table 6. This means that a general increase in the domestic and external interest-rate levels by 1 percentage point entails a loss of kr. 2.8 billion. The sensitivity of foreign bonds to changes in interest rates constituted just over 60 per cent of the overall sensitivity to changes in interest rates.
Table 6 Interest-Rate Sensitivity of the Nationalbank
| Capital loss in kr. billion on a general 1 per cent increase in interest rates |
End-1998 | End-1999 |
| Kroner | 1.1 | 1.1 |
| Euro1 | 1.3 | 0.9 |
| Pound sterling | 0.2 | 0.2 |
| Swiss franc | 0.0 | 0.0 |
| Dollar | 0.6 | 0.5 |
| Yen | 0.2 | 0.2 |
| Total | 3.4 | 2.8 |
| 1 | For 1998 the euro comprises ECU and the sum of the national currencies of the euro area member states. |
The sensitivity to changes in interest rates for outstandings in kroner can be related to the domestic securities portfolio. A large proportion of the sensitivity to changes in interest rates of the domestic securities portfolio relates to mortgage-credit bonds. Since mortgage-credit bonds can be redeemed prematurely, the interest-rate sensitivity is more difficult to determine than for e.g. government bonds. The Nationalbank undertakes model calculations of the sensitivity adjusted for the risk of early redemption of the portfolio of mortgage-credit bonds.
Foreign-exchange exposure
The Nationalbank holds considerable foreign-exchange assets, first and foremost the foreign-exchange reserve. The Nationalbank therefore – like other central banks – cannot avoid exposure to a foreign-exchange risk.
The Nationalbank's foreign-exchange exposure is subject to coordinated management with the foreign-exchange exposure of the central government's foreign-exchange-denominated debt. This coordinated management entails that the government debt denominated in dollar, yen, pound sterling and Swiss franc in principle is set off by the Nationalbank's holding equivalent assets. The net position, i.e. the difference between the Nationalbank's foreign-exchange-denominated assets and the central government's foreign-exchange-denominated liabilities, has in recent years been primarily in the core EMS currencies, mainly D-mark, and now euro. In view of the Danish fixed-exchange-rate policy these currencies are found to entail the lowest risk. Moreover, it is sought to minimise the exchange-rate risk on both the central government's foreign-exchange-denominated liabilities and the Nationalbank's foreign-exchange-denominated assets. The exchange-rate risk on the central government's foreign-exchange-denominated liabilities is limited by e.g. the central government's use of swaps to obtain liabilities denominated in euro if loans are raised in other currencies. The Nationalbank limits the exchange-rate risk by forward sale of dollars, pounds sterling, yen and Swiss francs against euro. This reduces the exchange-rate risk on the Nationalbank's bond and money-market placements in those currencies. For example, at the close of 1999 the Nationalbank held pound sterling assets for kr. 12 billion, but had sold sterling forward for kr. 11 billion. The total net sterling outstandings thereby amounted to kr. 1 billion.
The Nationalbank's foreign-exchange exposure therefore almost entirely comprises euro, cf. Table 7. The result is thus to only a moderate degree affected by fluctuations in the krone's exchange rate vis-à-vis the dollar, yen, pound sterling and Swiss franc.
Table 7 Foreign-Exchange Exposure of the Nationalbank
| Market value, kr. billion | End-1998, net |
End-1999 | ||
| Placements | Forward contracts |
Net | ||
| Euro1 | 109 | 110 | 55 | 164 |
| Pound sterling | 0 | 12 | -11 | 1 |
| Swiss franc | -1 | 0 | 0 | 0 |
| Dollar | 2 | 38 | -38 | 0 |
| Yen | -1 | 11 | -9 | 2 |
| Gold | 4 | 5 | 0 | 5 |
| Total | 111 | 174 | -3 | 172 |
| Note: | Negative amounts indicate that the Nationalbank holds liabilities. The value of SDR is distributed on the respective currencies. |
| 1 | For 1998 the euro comprises ECU and the sum of the national currencies of the euro area member states. |
Liquidity
The primary objective of the foreign-exchange reserve is to be able to intervene in the foreign-exchange market. In the
management of the foreign-exchange reserve great emphasis is thus placed on the possibility to convert a significant
proportion of the foreign-exchange reserve to liquid funds quickly. Therefore a large proportion of the foreign-exchange
reserve is held in on-demand accounts or in bonds with a high credit rating which can be either easily realised or
mortgaged. Moreover, the Nationalbank has access to liquidity via the central government's Commercial Paper
programme for USD 12 billion. The Nationalbank also holds an automatic borrowing right at the ECB in accordance
with the ERM II agreement, should the krone reach the fluctuation limit vis-à-vis the central rate.
Calculation of market risk
In order to evaluate the market risk and to support the setting of a framework for the interest-rate sensitivity the
Nationalbank employs various risk measures, including Value-at-Risk (VaR). This risk measure includes the
probability of interest and exchange-rate losses based on historical fluctuations. This risk measure therefore differs
from the calculation of the interest-rate sensitivity and the foreign-exchange exposure. The VaR risk measure is
supplemented with e.g. stress scenarios [1].
Table 8 The Nationalbank's Value-at-Risk
| Value-at-Risk in kr. billion with a 1-year horizon | End-1998 | End-1999 |
| Kroner | 1.1 | 1.5 |
| Euro1 | 4.1 | 1.6 |
| Pound sterling | 0.3 | 0.3 |
| Swiss franc | 0.1 | 0.0 |
| Dollar | 1.0 | 0.6 |
| Yen | 0.5 | 0.4 |
| Gain due to spread | 2.6 | 1.1 |
| Total | 4.5 | 3.3 |
| Note: | VaR indicates the contribution from both the interest and exchange-rate risks excluding gold. |
| 1 | For 1998 the euro comprises ECU and the sum of the national currencies of the euro area member states. |
At the close of 1999 the Nationalbank's VaR was kr. 3.3 billion [2], cf. Table 8. This figure can be interpreted to indicate that there is only a 5 per cent probability that during the coming year the Nationalbank will have total interest-rate and exchange-rate losses exceeding kr. 3.3 billion. At the close of 1998 VaR was kr. 4.5 billion.
The decrease in 1999 is primarily related to the krone's stability vis-à-vis the euro, but also the normalisation of the financial markets after the unrest in autumn 1998.
Credit risk
The credit risk is the Nationalbank's risk of loss on an account with a counterparty due to the counterparty's default in obligations.
To reduce the credit risk the Nationalbank seeks to hold assets only with counterparties with a high credit standing. Moreover, to a large extent collateral is required.
The credit risk on the foreign assets, i.e. accounts with foreign governments, banks, etc., is managed on the basis of the ratings given by international rating agencies. Moreover, all significant outstandings are subject to maximum limits.
For deposits with foreign banks repo agreements are used to a great extent. In repo agreements, the Nationalbank receives government bonds as collateral. Should a foreign bank be subject to compulsory liquidation, the Nationalbank's deposit is covered by the collateral provided. The Nationalbank's foreign bonds are issued or guaranteed by states with a high rating, or issued by supranational institutions. The Nationalbank thus does not hold corporate bonds or bonds issued by governments with a low credit rating.
On placement of the domestic securities portfolio great weight is also attached to the high credit standing of the issuers. The securities portfolio comprises government bonds, mortgage-credit bonds and Ship Credit Fund bonds, etc.
Table 9 shows the Nationalbank's very moderate credit risk since more than 90 per cent of the foreign-exchange reserve and the domestic securities portfolio are placed with supranational institutions or in assets with a rating of Aa3 or higher.
Table 9 Total Credit Exposure on the Foreign-Exchange Reserve and the Domestic Securities Portfolio, etc., End-1999
| Kr. billion | Bonds | Bank transactions | Supra- national institutions |
Total | ||
| Govern- ments |
Others | Collateral- ised |
Uncollate- ralised |
|||
| Aaa | 51.3 | 15.3 | 0.0 | 4.1 | 2.7 | 73.4 |
| Aa1 | 13.5 | 0.7 | - | 3.0 | - | 17.2 |
| Aa2 | 2.1 | 1.5 | 3.4 | 6.6 | - | 13.5 |
| Aa3 | 12.3 | 12.7 | 21.1 | 17.3 | - | 63.4 |
| A1 | - | - | 0.9 | 2.9 | - | 3.8 |
| A2 | - | - | - | 3.0 | - | 3.0 |
| A3 | 0.2 | - | 0.2 | |||
| No rating | - | 5.41 | 0.9 | 0.0 | 22.42 | 28.8 |
| Total | 79.1 | 35.7 | 26.6 | 36.8 | 25.1 | 203.3 |
| Note: | Moody's credit rating is used. The scale extends from Aaa to D, where Aaa is the highest credit rating. For more details of ratings reference is made to Kristian Sparre Andersen and Anders Matzen, The Use of Ratings in the European Capital Markets, cf. Danmarks Nationalbank, Monetary Review, 3rd Quarter 1998. |
| 1 | Individual Danish mortgage-credit institutes and similar. |
| 2 | Solely covers BIS and IMF. |
There is only a small credit risk related to the Nationalbank's monetary-policy operations, the banks' overnight credits and cash depots, since collateral is always required.
Presentation of the Nationalbank's Accounts
The Nationalbank's Accounts with notes are shown on pp. 125-133.
The accounts for 1999 have been prepared in accordance with the same accounting policies as in the previous year, with the exception of reclassification of the items under expenses in the profit and loss account. Furthermore, as a consequence of the adjustments to the monetary-policy instruments banks and mortgage-credit institutes are now shown in the same items of the accounts. The reclassification does not affect the profit for the year or the value of the assets and liabilities.
The accounts reflect that the Nationalbank issues banknotes and coins, administers the foreign-exchange reserve and functions as banker to the banks and the central government.
In 1999 the profit from financial items was kr. 1,933 million and thereby kr. 3,910 million lower than in 1998. The significant decrease primarily reflects negative value adjustments of kr. 3,081 million, compared to positive value adjustments of kr. 995 million in 1998, equivalent to a deterioration by kr. 4,076 million in total. After other income of kr. 84 million and expenses of kr. 545 million the profit for the year was kr. 1,472 million, or kr. 3,956 million less than in 1998.
The balance sheet has increased from kr. 182.8 billion to kr. 281.8 billion. With regard to assets the increase is primarily in foreign assets and loans to banks and mortgage-credit institutes, while the increase in liabilities is primarily related to deposits from banks and mortgage-credit institutes and to certificates of deposit.
The profit and loss account
Net income from interest
Net income from interest totalled kr. 5,014 million, which is kr. 166 million more than in 1998.
Income from interest on foreign assets rose by kr. 417 million to kr. 5,519 million. The increase is primarily a consequence of the fact that on average the foreign-exchange reserve was kr. 32 billion larger in 1999 than in 1998.
Interest on lending to and deposits from the banks and mortgage-credit institutes gave respectively income from interest of kr. 822 million, compared to kr. 1,455 million in 1998, and interest expenditure of kr. 192 million, compared to kr. 212 million in 1998. The interest expenditure on certificates of deposit amounted to kr. 1,778 million, compared to kr. 1,965 million in 1998. The net interest expenditure to banks and mortgage-credit institutes (including interest on certificates of deposit) was thus kr. 1,148 million, compared to kr. 721 million in 1998. The rates of interest for certificates of deposit and lending are identical, while the rate of interest for deposits is slightly lower. The interest rates have all been lower than the equivalent rates for 1998, but since the banks and mortgage-credit institutes have had a substantially larger net position vis-à-vis the Nationalbank than in 1998, cf. p. 42, the total net interest expenditure has increased.
The Nationalbank's interest expenditure on the central government's deposit fell by kr. 217 million to kr. 1,828 million. The central government's deposit was on average higher than in the preceding year, while the discount rate, which is the rate of interest on the central government's deposit, was lower.
Interest on loans to other borrowers fell by kr. 36 million to kr. 187 million. The change can be attributed to a decrease by kr. 90 million because during the year the Danish Export Finance Corporation redeemed all loans, and an increase of kr. 54 million from currency swaps with the Ship Credit Fund of Denmark. The increase of kr. 54 million is related mainly to the settlement of income from interest at a higher dollar rate than in 1998.
Interest to other depositors, etc. rose by kr. 72 million to kr. 210 million, primarily as a consequence of the fact that in 1999 the Nationalbank took over additional commitments vis-à-vis the Ship Credit Fund of Denmark, i.e. index-linked loans for a total index value of kr. 3,066 million.
Interest and dividend on bonds and shares, etc. rose by kr. 24 million to kr. 2,544 million.
Value adjustments, etc.
Value adjustments, etc. resulted in a loss of kr. 3,081 million.
Value adjustment of the Nationalbank's gold stock gave a gain of kr. 636 million, which is mainly related to a higher dollar rate, while the price of gold in dollars was virtually unchanged.
In addition to the foreign-exchange reserve the value adjustment of foreign-exchange positions comprises unsettled foreign-exchange contracts, currency and interest-rate swaps and domestic foreign-exchange balances, as well as the counterpart of Special Drawing Rights (SDR) allocated by the IMF. The value adjustment gave a loss of kr. 2,684 million, which can be attributed to an exchange-rate gain of kr. 535 million and a market-value loss of kr. 3,219 million. The exchange-rate gain is related primarily to the development in SDR.
The value adjustment of (domestic) bonds and shares gave a loss of kr. 1,034 million, of which the loss on bonds was kr. 1,287 million, while the sale of shares in Finance for Danish Industry (FIH) realised a gain of kr. 253 million. This was equivalent to the sales proceeds since the Nationalbank's share portfolio was included in the accounts at kr. 1 per shareholding.
The market-value loss on domestic and foreign bonds can be related partly to the general increase in international interest rates and partly to the fact that a large proportion of the bond portfolio at the beginning of the year had a market value above par, and therefore automatically released a capital loss in step with redemption, or because the redemption date was forthcoming.
Other income from ordinary operations
Other income in 1999 amounted to kr. 84 million, of which the greatest part concerns the liquidation of a reserve fund under the IMF.
Expenses
Total expenses increased by kr. 63 million to kr. 545 million, or 13.0 per cent.
Staff expenses rose by kr. 35 million to kr. 298 million, equivalent to an increase of 13.1 per cent. Of the increase kr. 25 million constitutes provisions for support and severance schemes concerning both the present and previous years.
Other expenses rose by kr. 28 million to kr. 247 million, equivalent to an increase of 12.9 per cent. Part of the increase can be attributed to an increase in investments. In accordance with the bank's accounting policies these investments are entered as expenditure in the year of acquisition. Moreover, the information campaign for the new banknote series required increased expenditure.
Result for the year
The result for the year is a profit of kr. 1,472 million, against a profit of kr. 5,428 million in 1998. In accordance with the practice for allocation of profits the loss on value adjustments of kr. 3,081 million is covered by a transfer from the Value Adjustment Reserve, which herefter amounts to kr. 20 million. Kr. 1,366 million is allocated to the General Reserves. This corresponds to 30 per cent of the profit excluding value adjustments, after which the General Reserves total kr. 41,439 million. The remainder of kr. 3,188 million is payable to the central government.
The balance sheet
Stock of gold
The stock of gold amounted to kr. 4.6 billion at the end of the year, compared to kr. 3.9 billion one year before. The increase is related solely to the increase in the price of gold in kroner by 16 per cent during 1999.
Foreign assets
Assets amounted to kr. 154.7 billion at the end of the year, compared to kr. 89.4 billion one year before. This is equivalent to an increase of 73 per cent. The assets are placed in euro (69 per cent), dollars (18 per cent), pound sterling (7 per cent) and yen (6 per cent). The positions are held mainly in government bonds,government-guaranteed or highly-rated bonds, deposits with central banks and commercial banks, or as lending against collateral in government bonds.
Foreign assets are the most significant item of the foreign-exchange reserve, together with the stock of gold, claims on the IMF and foreign liabilities.
Claims on the International Monetary Fund (IMF)
The balance-sheet item comprises Denmark's IMF quota less the IMF's holdings of Danish kroner at the Nationalbank, with addition of the bank's holdings of Special Drawing Rights (SDR) with the IMF. During the year this asset decreased by kr. 0.9 billion to kr. 8.4 billion, which is related to the value adjustment for the year and the transactions of the IMF. In 1999 the quota was raised by SDR 0.6 billion. This is the background to the strong increase in the quota and in the IMF's holdings of Danish kroner.
Loans, etc.
Loans mainly comprise accounts with banks and mortgage-credit institutes and must be evaluated together with the item deposits, etc. and certificates of deposit. The net assets of the banks and mortgage-credit institutes with the Nationalbank increased during the year from kr. 14.7 billion to kr. 68.3 billion. This includes loans related to cash depots, which rose from kr. 2.9 billion to kr. 5.0 billion.
Bonds and shares, etc.
The holdings comprise domestic securities and constitute kr. 37.7 billion, which is by and large unchanged from the previous year. The holdings are primarily municipal-credit and mortgage-credit bonds (kr. 17.0 billion), government bonds (kr. 14.1 billion) and Ship Credit Fund bonds (kr. 6.5 billion). Shares are included at kr. 1 per shareholding.
Banknotes and coins in circulation
Banknotes in circulation rose by kr. 5.2 billion to kr. 42.4 billion, while coins in circulation increased by kr. 0.1 billion to kr. 4.0 billion. Banknotes in circulation include Faroese notes at kr. 282 million. A large proportion of the increase in
banknotes in circulation is related to extraordinarily large holdings by the banks in connection with the safeguarding of cash supplies at the millennium change, cf. p. 68.
Foreign liabilities
The liabilities increased by kr. 1.2 billion to kr. 2.4 billion and comprise krone deposits with the Nationalbank from supranational institutions and other central banks.
Counterpart of Special Drawing Rights (SDR) allocated by the IMF
The allocation was unchanged during the year and the increase in the item by kr. 0.2 billion to kr. 1.8 billion solely reflects the value adjustment for the year.
Deposits, etc.
Besides deposits from banks and mortgage-credit institutes of kr. 38.7 billion this item includes other deposits of kr. 7.7 billion, of which the account with the Ship Credit Fund of Denmark is the largest at kr. 3.9 billion.
Certificates of deposit
Certificates of deposit, which are the Nationalbank's short-term debt securities sold to banks and mortgage-credit institutes, rose by kr. 65.1 billion to kr. 99.9 billion.
Central government
The central government deposit increased from kr. 37.1 billion to kr. 39.7 billion. The central government's share of the result of the Nationalbank is included in this amount.
Net capital
The net capital amounts to kr. 41,758 million, which is the net capital at the beginning of the year of kr. 43,474 million less negative value adjustments of kr. 3,081 million and addition of a share of kr. 1,366 million of the result before value adjustments.
Copenhagen, end-February 2000
Bodil Nyboe Andersen Torben Nielsen Jens Thomsen
At the meeting of the Board of Directors held on 16 March 2000 the Board of Governors reported on the activities of the Nationalbank in 1999. The report was noted.
The Nationalbank's accounts for 1999 were submitted by the Board of Governors for adoption on the recommendation of the Committee of Directors. The Board of Directors and the Royal Bank Commissioner accepted the recommendation.
Footnotes
[1] Stress scenarios are calculation examples whereby the consequence of an extreme market development is investigated, e.g. historical interest-rate and exchange-rate trends in particularly unfavourable periods.
[2] VaR is calculated on the basis of estimated correlations and volatilities between relevant financial variables. By combining these estimates with the Nationalbank's portfolio composition VaR can be found.
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Version 1.0 April 2000 Nationalbanken.
Published by Danmarks Nationalbank April 2000, http://www.nationalbanken.dk