|
Like other national central banks, Danmarks Nationalbank performs
systematic analyses of financial stability. In 2000 and 2001 the
analyses were included in the Monetary Review for the 2nd Quarter[1].
From 2002 Danmarks Nationalbank will publish annual financial-stability
reports for Denmark. The purpose of analysing financial stability is to
assess whether the financial sector is sufficiently robust so that
problems in this sector will not impede the functioning of the financial
markets as efficient providers of capital for companies and households.
The report is in two parts. The first part deals with the trends in
financial stability, while the second part of the report elaborates on
four current issues of relevance to financial stability. The approach is
to consider risks and stability in the financial system, not the
individual institutions in the financial sector.
Financial stability primarily depends on the development in the
banking institutions. The banking institutions' financial situation is
closely linked to the general economic trend in Denmark, particularly
the finances of Danish companies and households.
Trends in the real economy
The subdued
economic growth in 2001 in most of Denmark's major trading partners has
only had a relatively moderate effect in Denmark. The strong growth seen
in 2000 was expected to subside in 2001, but actual growth turned out to
be slightly lower than expected, at only 1 per cent in 2001.
The general robustness of the Danish economy is reflected in a
steadily increasing rate of employment throughout most of 2001, and a
decline in unemployment to the lowest level for decades. For some years,
the annual rate of increase for consumer prices has been around 2 per
cent, which was also the case in 2001 and the first months of 2002.
Hourly wages rose by just over 4 per cent, implying growth in real
income by about 2 per cent. Hourly productivity rose by just over 1 per
cent in 2001 against 4 per cent in the preceding year. Presumably this
merely reflects fluctuations in economic growth in a tight labour market
and is thus unlikely to be an expression of lower underlying
productivity growth.
At 2.5 per cent of the gross domestic product (GDP) the government
surplus was on a par with the result in 2000. Proceeds from taxation of
pension yields declined to almost zero owing to falling stock prices,
but this was offset by increased income from corporate tax. Government
debt declined to approximately 44 per cent of GDP.
The current-account surplus increased from approximately 1.5 per cent
of GDP in 2000 to 2.5 per cent in 2001. This reflects a good export
performance in an international perspective, since Danish exports are
less sensitive to global economic fluctuations than the exports of most
other countries. Exports also contributed to sustained positive growth
in corporate investments.
The KFX index of the most liquid Danish shares basically followed the
trend in the international stock markets and decreased by 20 per cent in
2001, irrespective of the more positive economic development in Denmark
than abroad.
The krone was stable vis-à-vis the euro, remaining close to the
central rate in ERM2, and in general Danish interest rates have followed
the corresponding European rates. Since early 2000 bond yields have been
more or less stable, as declining yields in the summer of 2001 and
immediately after the terrorist attacks in the USA were followed by an
upward trend late in the year and early in 2002. Danmarks Nationalbank
followed suit when the ECB lowered its interest rates and has also
narrowed the spread between its lending rate and the ECB's minimum bid
rate to 0.3 per cent.
The effective krone rate has been relatively stable since January
2001, but occasional fluctuations in particularly the Swedish krona may
have affected Danish companies in direct competition with Swedish
companies.
Financial savings in the private sector, i.e. gross savings less
gross investments, balanced in 2001 after a financing requirement had
been seen in the preceding few years. The improvement amounted to
approximately 1 per cent of GDP. Since growth in households' consumption
was significantly lower than growth in income, and since housing
investments declined considerably from the very high level in 2000
(resulting from repairs of the damage caused by the hurricane in
December 1999), the households' savings balance improved slightly more
than that of the private sector overall. The excess savings of the
corporate sector diminished correspondingly.
Financial-sector trends
The economic slowdown in 2001 had no impact on the overall result of
the Danish banking institutions. Higher interest income offset the
declining value adjustments and increased losses and provisions. The
credit quality deteriorated in 2001, and banking institutions expect
higher credit losses in the future, but an economic upturn may dampen
further increases in losses and provisions.
The banking institutions' lending rose more strongly than deposits in
2001, which led to an increase in the deposit deficit. Growth in lending
is increasingly financed via debt to other credit institutions. This
source of financing is less stable than deposits, and financing risks
may therefore have increased for a number of institutions.
For most banking institutions, costs increased in 2001, which has
contributed to lower operating income over operating expenses.
Overall, capital adequacy increased slightly in 2001, although a
number of small and medium-sized banks saw a decline in capital
adequacy.
On the basis of current earnings, banking institutions as a whole are
deemed to be robust, but not quite as robust as in 2000.
Trends in the corporate sector and the households
The incidence of compulsory liquidations has increased in recent
years, reflecting the fact that the strong economic growth seen in the
last half of the 1990s has subsided.
The analysis shows that some sectors are particularly exposed,
including IT and telecom, as well as trade, hotels and restaurants. On
the basis of the economic slowdown in 2001 the financial situation in
the corporate sector is, however, deemed to be fairly good. An improved
economic climate may alleviate the pressure on the exposed companies.
Overall, the households have sound net assets, but when pension
savings are excluded, they have relatively modest net debt. However, the
average figures conceal considerable individual differences. The most
debt-ridden home-owners have become more vulnerable to declining income.
Owing to the low short-term interest rates at present, floating-rate
loans have become immensely popular. Such loans offer home-owners lower
immediate payments in comparison with traditional fixed-rate loans. When
applied with caution and awareness of the potential risks, this trend
will not have significant effect on financial stability. However,
home-owners should be aware of the increased financial risk associated
with floating-rate loans.
Trends in the financial markets
The events on 11 September 2001 showed that generally the financial
institutions were able to resist major shocks in the financial markets.
However, the pension sector was severely affected by plummeting share
prices and low interest rates in the autumn of 2001.
The events in the autumn of 2001 highlighted the financial risk
factors. The need for stress tests has been emphasised in connection
with the assessment of the stability of financial institutions.
The negative trend in the stock markets in 2001 meant a fall in both
the number of share issues and the total value of share issues on the
Copenhagen Stock Exchange in comparison with 2000.
Issues related to financial stability
Pension companies play an important role in the financial sector, by
smoothing out risks among pension savers and as managers of long-term
savings. When compared with banks, the effect of pension companies on
financial stability is, however, assessed to be more indirect. Pension
companies may affect financial stability via the financial markets, via
group ties with banks or via other types of risk transfer between banks
and pension companies. The events in the autumn of 2001 showed that
although there were problems in this sector, the impact on financial
stability was limited.
Excess capital reserves and a good earnings capacity both help to
safeguard banks and thus ensure financial stability. Banks constantly
strive to achieve the optimum relationship between earnings capacity,
capital base and risk profile. Capital-allocation models, as implemented
by several major banks, are found to be very useful in this connection.
Such models can be good strategic tools which can enhance the banks'
risk management when combined with traditional credit rating.
Settlement of payments is an important function for the banking
institutions and of great importance to financial stability. Payment
systems can spread credit or liquidity problems from one banking
institution to another. Simulations have been performed of various
failure scenarios in the two major Danish payment systems, Kronos and
the sum clearing. The objective of the simulations was to quantify the
extent to which problems experienced by the largest single participant
may spread to other system participants. The simulations show that other
participants are only affected to a limited degree, but that ample
liquidity in the systems is a decisive factor.
Banking institutions evolve over time, and therefore methods for
analysing financial stability must also be continuously adjusted and
improved. The individual analyses cannot shed full light on the
situation in the sector, but by piecing together the results an overall
picture can be gained, which can, with some caution, be taken as an
expression of the robustness in the sector and thus an indication of the
conditions for financial stability.
Footnotes
[1] |
See Financial
Stability, Danmarks Nationalbank, Monetary Review, 2nd Quarter
2000 and 2nd Quarter 2001. |
| 
