| Publication overview |
| Contents |
| Foreword |
| Report of the board of governors 2009 |
| Organisation and tasks of Danmarks Nationalbank |
| Risk management |
| Accounts |
Risk Management
Operational risk
Cash supply
In June 2009, Danmarks Nationalbank and the Danish Bankers Association decided that the current cash centres in banks operating decentralised banknote and coin holdings for Danmarks Nationalbank are to be taken over by a new company owned jointly by Danmarks Nationalbank and the banks. At the same time a process will be initiated to gradually reduce the number of cash centres at banks to only two.
The final decision concerning a new cash-handling system is expected to be taken in the 1st half of 2010.
Danmarks Nationalbank and the Danish Bankers Association have also initiated the preparation of new industry standards regarding security features for cash centres and cash transports in Denmark. The security standards are to be developed by Danish Standards, with input from all players and stakeholders involved in the supply of cash. This is in accordance with the general rules for development of standards in Denmark. The security standards are expected to be ready some time during 2010, so that, after a transitional period, it can be used as a foundation for cash-supply contracts.
Business continuity
Like other institutions, Danmarks Nationalbank in 2009 accepted an offer from the Danish health authorities to vaccinate key staff with a view to ensuring business continuity for critical functions in the event that influenza H1N1 developed into an epidemic affecting many people at the same time.
Financial risk
Danmarks Nationalbank is exposed to a number of financial risks. Some of them arise from its role as monetary authority, while others reflect how Danmarks Nationalbank, in its capacity as a financial enterprise, takes on risk in the expectation of reaping a reward to match the risk. The choice of risk level is characterised by prudence. Danmarks Nationalbank is exposed to market risks such as interest-rate, gold and foreign-exchange risks as well as liquidity and credit risks.
During the year, the foreign-exchange reserve grew by kr. 183 billion to kr. 395 billion. Management of Danmarks Nationalbank's portfolios reflected the wish to place the funds at an acceptable level of risk. If the foreign-exchange reserve increases, the funds are normally placed as collateralised bank deposits, but in 2009 part of the increase was invested in government bonds with high credit ratings.
In early 2009, there was still turmoil in the money market, and many counterparties were downgraded. As the year progressed, the financial markets calmed down. In many countries, monetary policies remained unusually accommodative, resulting in very low short-term interest rates. Since most of Danmarks Nationalbank's portfolio is invested short-term, current income from such investments was low. Increasing risk appetite and an improved economic outlook caused both country and credit spreads to narrow to the level observed before the autumn of 2008. This had a positive impact on the value of Danmarks Nationalbank's portfolio of credit-sensitive bonds such as mortgage-credit bonds, covered bonds and certain government bonds. The value of Danmarks Nationalbank's stock of gold, 66.5 tonnes, rose considerably.
Market risk
Market risk is the risk of suffering a loss as a consequence of price fluctuations in the financial markets.
Interest-rate exposure
Part of Danmarks Nationalbank's portfolio is invested in bonds. This entails exposure to changes in interest rates since fluctuations in market value mirror variations in interest-rate levels.
At end-2009 the interest-rate exposure was kr. 1.9 billion, cf. Table 4. Consequently, an increase by 1 percentage point in interest rates would entail a loss of kr. 1.9 billion due to price fluctuations. The increase of kr. 0.4 billion relative to end-2008 is attributable to factors such as Danmarks Nationalbank's decision to increase its portfolio of government bonds issued by euro area member states as a result of the increase in the foreign-exchange reserve.
| Interest-rate exposure of Danmarks Nationalbank | Table 4 | ||||||
| Kr. billion | DKK |
EUR |
USD |
GBP |
SEK |
Other |
Total |
| 2008 | 0.6 |
0.4 |
0.2 |
0.1 |
0.1 |
- |
1.5 |
| 2009 | 0.6 |
0.7 |
0.3 |
0.1 |
0.1 |
- |
1.9 |
| Note: The Table shows Danmarks Nationalbank's interest-rate exposure measured by the krone duration. The latter indicates the change in the market value of Danmarks Nationalbank's portfolio on a 1-percentage-point change in the general level of interest rates. | |||||||
The interest-rate exposure of the domestic securities portfolio remained unchanged in 2009.
Gold exposure
Pursuant to the Danmarks Nationalbank Act, Danmarks Nationalbank is obliged to hold a stock of gold. At end-2009 the gold stock was 66.5 tonnes.
The price of gold has been rising in recent years, a trend that continued into 2009, cf. Chart 3. In Danish kroner, the price of gold increased by more than 25 per cent in 2009. Consequently, the market value of the gold stock rose by kr. 2.5 billion to kr. 12.3 billion, leading to an equivalent increase in the exposure to the price of gold.
| DEvelopment in the price of gold since 2002 | Chart 3 |
 |
|
Foreign-exchange exposure
The foreign-exchange reserve is predominantly invested in euro, reflecting Denmark's fixed-exchange-rate policy. A small part is invested in US dollars, pounds sterling and Swedish kronor.
Danmarks Nationalbank converts most of its foreign-exchange exposure in non-euro currencies to euro by means of forward contracts. The net result is an exposure in euro and a small exposure in dollars.
At the end of 2009, the foreign-exchange exposure was kr. 384.6 billion, cf. Table 5. Danmarks Nationalbank will thus incur a loss of just over kr. 3.8 billion if the krone strengthens by 1 per cent. The foreign-exchange exposure had increased by kr. 164.6 billion from the end of 2008, reflecting the larger foreign-exchange reserve. The increase was solely in euro. Due to the fixed-exchange-rate policy, fluctuations against the euro are small, and hence the foreign-exchange risk is limited.
| Foreign-exchange exposure of Danmarks Nationalbank | Table 5 | |||||
| Kr. billion | EUR | USD | GBP | SEK | Other | Total |
| 2008 | 214.5 | 5.4 | - | - | - | 220.0 |
| 2009 | 379.3 | 5.3 | - | - | - | 384.6 |
| Note: The foreign-exchange exposure is calculated after conversion to euro. | ||||||
Value-at-Risk
One measure of Danmarks Nationalbank's aggregate market risk is Value-at-Risk (VaR). VaR combines the exposure to various risk factors with an estimate of the volatility in these factors. The volatility estimates are based on historical observations. VaR is an expression of the maximum loss, with a probability of 95 per cent, that Danmarks National bank will incur within one year.
At the close of 2009, Danmarks Nationalbank's VaR was kr. 4.2 billion, which is kr. 1.6 billion lower than at the beginning of the year, cf. Chart 4. VaR fell despite the fact that the interest-rate, gold and exchange-rate exposures all increased. The reason was that markets were calmer in 2009 than in the autumn of 2008.
| Danmarks Nationalbank's value-at-risk | Chart 4 |
 |
|
| Note: VaR is calculated on the basis of volatility estimates based on price developments on the latest 160 trading days. Observations are weighted so that observations from the last two months are most significant. | |
VaR is a widely used risk measure, but it has its limitations. Since VaR is based on the most recent period, it is strongly influenced by market developments in that period. For example, if volatility estimates are based on observations from the autumn of 2008, VaR for Danmarks Nationalbank's exposure at end-2009 will be kr. 8.4 billion, which is twice as high at the VaR calculated on the basis of observations from the most recent period. Thus VaR does not give any indication of the losses if the markets once again become very turbulent. Hence, VaR should not be the only risk measure applied.
Stress tests
Danmarks Nationalbank supplements VaR with stress tests indicating how extreme, but possible, scenarios for market developments affect Danmarks Nationalbank's current portfolio.
In the most severe stress scenario, the loss to Danmarks Nationalbank will be just over kr. 26 billion. Such a loss will be caused by a significant drop in the gold price, coinciding with considerable appreciation of the krone and substantial interest-rate increases in the US and European markets. The loss resulting from this stress scenario is almost kr. 8 billion higher than at end-2008, reflecting the increased exposure to all three risk factors.
Liquidity risk
For Danmarks Nationalbank, liquidity risk is the risk that it is not possible to release funds for intervention even though the funds are held in reserve, or that release of the funds involves considerable excess costs. The purpose of the foreign-exchange reserve is to support the fixed-exchange-rate policy. In the management of the foreign-exchange reserve it is important to ensure that a large proportion of the reserve can readily be used for intervention in support of the krone. Most of the reserve is invested in the money market or in very safe securities that can easily be sold or pledged as collateral. In addition, Danmarks National bank can normally raise considerable amounts of foreign exchange by drawing on various standby credit facilities.
The autumn of 2008 saw very substantial drawings on Danmarks Nationalbank's foreign-exchange reserve, emphasising the need to maintain a liquid reserve of a certain size. In 2009, Danmarks Nationalbank enhanced the requirements for contingency liquidity, inter alia, by increasing investments in collateralised short-term bank deposits.
Credit risk
Credit risk is the risk of loss due to a counterparty's default on obligations. In its investment portfolio, Danmarks Nationalbank incurs credit risk on both bank deposits and securities investments. For securities, credit risk also comprises the risk that the credit rating of a counterparty drops, resulting in a capital loss.
Danmarks Nationalbank seeks to limit its credit risk by requiring that counterparties have high credit ratings, and by spreading its assets over many counterparties. In addition, investments with counterparty banks are to a large extent subject to provision of collateral. The collateral, virtually only government bonds, must be high-quality assets. Danmarks Nationalbank is entitled to sell the collateral if a counterparty fails, thereby covering its losses. This was exactly what happened when Lehman Brothers filed for Chapter 11 in September 2008. Danmarks Nationalbank had a deposit against government securities as collateral. These were sold immediately after the bankruptcy, and Danmarks National bank did not suffer any losses. None of Danmarks National bank's counterparties failed in 2009.
In the course of the year, Danmarks Nationalbank introduced new internal rules for approval of counterparty banks. The rules are based on the international rating agencies' long-term ratings, which take into account how the option of government support impacts on the credit risk on bank deposits. This should be seen in the light of experience from the crisis, which showed that systemically important banks were rescued more often than not.
Credit exposure
The credit exposure is an expression of the potential loss to Danmarks Nationalbank if a counterparty fails. It does not indicate the probability that this will happen. The size of the loss will also depend on the proportion of the claim that is lost.
The credit exposure increased in 2009, cf. Table 6. The reason is that the foreign-exchange reserve grew, entailing more investments, both in the money market and in bonds. At the close of the year, 81 per cent of Danmarks Nationalbank's portfolio was invested in category Aa3 or higher.
| Credit exposure for Danmarks Nationalbank's portfolios, end-2009 | Table 6 | |||||||
Kr. billion |
2008 total |
Bonds |
Bank claims |
Supra- national institutions4 |
Central banks |
2009 total |
||
Govern-ment |
Others1 |
Collat-eralised2 |
Uncollat-eralised3 |
|||||
| Aaa | 62.9 |
130.5 |
32.5 |
- |
1.5 |
3.2 |
10.0 |
177.7 |
| Aa1 | 85.1 |
18.3 |
13.2 |
25.3 |
3.1 |
- |
- |
59.9 |
| Aa2 | 30.7 |
14.9 |
- |
- |
15.1 |
- |
- |
29.9 |
| Aa3 | 9.9 |
- |
- |
49.1 |
15.7 |
- |
- |
64.8 |
| A1 | 10.1 |
- |
- |
3.7 |
6.3 |
- |
- |
10.0 |
| A2 | 3.1 |
0.8 |
1.3 |
23.2 |
4.0 |
- |
- |
29.2 |
| A3 | - |
- |
- |
18.8 |
- |
- |
- |
18.8 |
| No rating | 32.2 |
- |
1.5 |
- |
1.0 |
3.5 |
15.2 |
21.2 |
| Total | 234.0 |
164.4 |
48.5 |
120.2 |
46.5 |
6.7 |
25.3 |
411.6 |
| Note: Moody's credit rating is used. The scale ranges from Aaa to D, where Aaa is the highest rating. 1 Other bonds include securities with both explicit and implicit government guarantees and Danish issuers. 2 Collateralised bank claims are repos. 3 Uncollateralised bank claims are deposits, correspondent accounts, forward foreign-exchange contracts and swaps with Danish Ship Finance. 4 Supranational institutions such as BIS, IMF and the Asian Development Bank. |
||||||||
The exposure to supranational institutions with no rating comprises the IMF, among others. In 2009, the IMF's drawing rights increased by kr. 36.3 billion to kr. 55.6 billion, of which kr. 3.3 billion had been exercised at year-end.1 The risk on this exposure is assessed to be small.
The credit spread exposure indicates how much Danmarks National bank will lose if the credit spread vis-à-vis a certain counterparty widens by 1 percentage point. It is thus equivalent to the interest-rate exposure on an individual counterparty. Danmarks Nationalbank's interest-rate exposure increased in 2009, but primarily versus governments with the highest possible credit rating. Hence the risk that spreads will widen considerably is assessed to be low.
1 For a more detailed discussion of Danmarks Nationalbank's accounts with the IMF, see Thomas Krabbe Jensen and Søren Vester Sørensen, Danmarks Nationalbank's Financial Accounts with the International Monetary Fund, IMF, Danmarks Nationalbank, Monetary Review, 4th Quarter 2009.
 |
| Publication in PDF-format |
| PC: Press the right mouse-button, choose "Save Link As", then choose where to save the file. |
| MAC: Hold down the mouse-button, choose "Save Link", then choose where to save the file. |
| Download Acrobat Reader:  |
