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"Report and Accounts 2001"

Appendix

Press Releases

Interest-rate changes

10 May 2001 on interest rate reduction
The discount rate is lowered by 0.25 per cent to 4.50 per cent. Likewise the rate of interest on the banks' current accounts with the Nationalbank is lowered by 0.25 per cent to 4.50 per cent. The Nationalbank's lending rate and the rate of interest on certificates of deposit is lowered by 0.30 per cent to 5.00 per cent.

The reduction will have effect from Monday 14 May 2001.

The interest rate reduction is a consequence of the lowering by 0.25 per cent in the European Central Bank's minimum bid rate on the main refinancing operations. The Nationalbank's lending rate and the rate of interest on certificates of deposit is lowered by a further 0.05 per cent as the krone has been very stable during recent months.

30 August 2001 on interest rate reduction
The discount rate is lowered by 0.25 per cent to 4.25 per cent. Likewise the rate of interest on the banks' current accounts with the Nationalbank is lowered by 0.25 per cent to 4.25 per cent. The Nationalbank's lending rate and the rate of interest on certificates of deposit are lowered by 0.30 per cent to 4.65 per cent.

The reduction will have effect as from 31 August 2001.

The interest rate reduction is a consequence of the lowering by 0.25 per cent in the European Central Bank's minimum bid rate on the main refinancing operations. The Nationalbank's lending rate and the rate of interest on certificates of deposit are lowered by a further 0.05 per cent as the krone has been very stable during recent months.

18 September 2001 on interest rate reduction
The discount rate and the rate of interest on the banks' current accounts with the Nationalbank are lowered by 0.50 per cent to 3.75 per cent. The Nationalbank's lending rate and the rate of interest on certificates of deposit are lowered by 0.50 per cent to 4.15 per cent.

The reduction takes effect as from 18 September 2001.

Following the terrorist attack on the USA several central banks, including the Federal Reserve and the European Central Bank, have lowered official interest rates by 0.50 per cent to counter the greater uncertainty concerning the economic development. The Nationalbank's reduction of interest rates is a result of this international development. The interest-rate differential between Denmark and the euro area is thus maintained.

8 November 2001 on interest rate reductionThe discount rate and the rate of interest on the banks' current accounts with the Nationalbank are lowered by 0.50 per cent to 3.25 per cent. The Nationalbank's lending rate and the rate of interest on certificates of deposit are lowered by 0.50 per cent to 3.60 per cent.

The reduction will have effect as from 9 November 2001.

The interest rate reduction is a consequence of the lowering by 0.50 per cent to 3.25 per cent in the European Central Bank's minimum bid rate on the main refinancing operations.

Election of chairman and deputy chairman of the committee of directors of Danmarks Nationalbank

29 March 2001
The Committee of Directors of Danmarks Nationalbank has re-elected Professor Hans E. Zeuthen as Chairman and Permanent Secretary Michael Dithmer as Deputy Chairman for the term running from 1 April 2001 to 31 March 2002.

Elections to the board of directors and to the committee of directors of Danmarks Nationalbank

15 January 2002
Elections to the Board of Directors of Danmarks Nationalbank

In accordance with the Danmarks Nationalbank Act 8 of the 25 members of the Board of Directors of Danmarks Nationalbank are elected by the Folketing (Parliament). After the parliamentary elections and the change of government there have been a number of changes regarding the members elected by the Folketing. The 8 members as of 15 January are the following:

• Elisabeth Arnold, MP
• Kristian Thulesen Dahl, MP
• Pia Gjellerup, MP; elected to replace Jan Petersen in December 2001
• Pernille Blach Hansen, MP
• Kristian Jensen, MP, elected to replace Christian Mejdahl in December 2001
• Holger K. Nielsen, MP, elected to replace Jes Lunde in October 2001
• Jens Rohde, MP, elected to replace Anders Fogh Rasmussen in December 2001
• Gitte Seeberg, MP

All have been elected for a term ending on 31 March 2006.

Election to the Committee of Directors of Danmarks Nationalbank

Mr. Anders Fogh Rasmussen withdrew from the Committee of Directors on his appointment as Prime Minister. The Board of Directors has elected Mr. Jens Rohde, MP as new member of the Committee of Directors for the remainder of the term ending on 31 March 2002.

Report and accounts for the year 2000

20 March 2001
At the meeting held today of the Board of Directors of Danmarks Nationalbank the Board of Governors presented the Report for 2000. The report was noted.

The Accounts for 2000 were submitted by the Board of Governors with the recommendation of the Committee of Directors that they be adopted. The Board of Directors and the Royal Bank Commissioner, the Minister for Economic Affairs and Nordic Cooperation, Ms. Marianne Jelved, endorsed the recommendation of the approval of the Accounts.

The net profit for the year was DKK 5,724 million, against DKK 1,472 million in 1999.

Net income from interest in 2000 totalled DKK 4,956 million, compared to DKK 5,014 million in 1999. Value adjustments were positive at DKK 1,343 million compared to a negative adjustment at DKK 3,081 million in 1999. These included a positive adjustment of gold at DKK 116 million, a positive adjustment of foreign assets at DKK 1,123 million, and a positive adjustment of bonds and shares, etc. at DKK 101 million. Expenses were DKK 556 million, against DKK 545 million in 1999.

In accordance with the established practice for allocation of profit:

• DKK 1,343 million – equivalent to value adjustments – was transferred to the Value Adjustment Reserve.
• DKK 1,314 million – equivalent to 30 per cent of the profit for the year before value adjustments – was transferred to the General Reserves.
• The remainder of DKK 3,066 million is payable to the central government. DKK 3,188 million was payable to the central government for 1999.

The Report and Accounts of Danmarks Nationalbank are published today. A summary of the Annual Report is enclosed.The Report and Accounts (in Danish) and an English translation of the Summary and the sections "The Danish Economy" and "Monetary and Exchange-Rate Policy" can be found on the Nationalbank's Website at www.nationalbanken.dk under Publications. The complete English translation is available on the Website on 21 March 2001 and in a printed version on 29 March 2001.

Elections to the Board of Directors

The 5-year term of 13 of the 25 members of the Board of Directors ends on 31 March 2001. The following elections and appointments were made for a new 5-year term running from 1 April 2001 to 31 March 2006:

Folketinget (Parliament), which elects 8 members, has elected Members of Parliament Ms. Elisabeth Arnold, Mr. Kristian Thulesen Dahl, Ms. Pernille Blach Hansen, Mr. Jes Lunde, Mr. Christian Mejdahl, Mr. Jan Petersen, Mr. Anders Fogh Rasmussen and Ms. Gitte Seeberg. Member of Parliament Ms. Pia Christmas Møller resigns from the Board of Directors.

The Royal Bank Commissioner, who appoints 2 members, has re-appointed Mr. Michael Dithmer and appointed Mr. Michael Lunn. Mr. Karsten Olsen has taken his retirement.

The Board of Directors elects 15 members, of whom 3 are up for election each year. The Board of Directors has re-elected Mr. Johannes Fløystrup Jensen and Mr. Finn Thorgrimson and elected Ms. Kirsten Nissen to succeed Ms. Margit Vognsen, who did not seek re- election.

The Board of Directors elected Mr. Hans E. Zeuthen as Chairman and Ms. Helle Bechgaard as Deputy Chairman for the coming year.

Elections to the Committee of Directors
The Committee of Directors has 7 members. The Board of Directors, which elects 5 members, has re-elected Mr. Søren Bjerre-Nielsen, Ms. Pernille Blach Hansen, Mr. Anders Fogh Rasmussen and Mr. Hans E. Zeuthen to the Committee of Directors. Ms. Kirsten Nissen was elected as new member of the Committee of Directors to succeed Ms. Margit Vognsen. All elections are for the coming year.

Two members of the Committee of Directors, Mr. Michael Dithmer and Mr. Michael Lunn, are appointed by the Royal Bank Commissioner for a 5-year period.

Appointments

10 September 2001
The Board of Governors of Danmarks Nationalbank have announced the appointment of Hugo Frey Jensen, Head of Division, to Head of Department. Hugo Frey Jensen is aged 43, holds an MSc in economics, and has held positions at Danmarks Nationalbank since 1984. Since 1996 Hugo Frey Jensen has been head of the division of Economics dealing with analysis of monetary and foreign-exchange conditions.

For the period from 1 January 2001 to 31 December 2003 Benny Andersen, Head of Financial Markets, has been appointed Alternate Executive Director at the International Monetary Fund. Benny Andersen is aged 43, holds an MSc in economics, and has held positions at Danmarks Nationalbank since 1984.

Hugo Frey Jensen will serve as Head of Financial Markets during the period of Benny Andersen's stay at the IMF.

14 December 2001
The Committee of Directors of Danmarks Nationalbank have announced the appointment of Christian Ølgaard, Assistant Head of Division, to Head of Division. Christian Ølgaard has been head of the section of Economics dealing with the international economy, and he will in the future be deputy head of Economics.

Christian Ølgaard aged 37 holds an MSc in economics, and has held position at Danmarks Nationalbank since 1990, except for 4 years in the Prime Minister's Office.

Notes and coins

25 September 2001 on new portrait of the Queen on 10- and 20-krone coins
As from 2001 the 10- and 20-krone coins are minted with a new portrait of the Queen. Like the portrait on the commemorative coins to mark Queen Margrethe's 60th birthday, the new portrait is by the sculptor Professor Mogens Møller.

The portrait of the Queen on the 10- and 20-krone coins is replaced in order to ensure a contemporary portrait which is as close a likeness as possible. For the present coin series, which was introduced in 1989, two previous portraits of the Queen have been used. The two portraits were by respectively Hanne Varming (used in 1989-1993) and Jan Petersen (used in 1994-1999). Coins with these portraits may still be used.

The coins with the new portrait are sent into circulation as from 26 September 2001 and will be included in the year's coin set from The Royal Mint. The coin set can be purchased at banks as from 15 October.

3 July 2001 on new Faroese 50-krone banknote
On 3 July 2001 a new 50-krone banknote is issued in the Faroe Islands. It is the first in a new series of Faroese banknotes to be issued over a period of 3 years. On the five new banknotes in the series the primary motif is fragments of various Faroese animals. The other motifs on the face and reverse of the banknotes are inspired by the Faroese landscape.

• Why issue new banknotes?
  As set out in the Act on Faroese Banknotes the Faroese banknotes must have the same face value and dimensions as Denmark's banknotes. As Denmark has a new note series with new formats and a new note value, the Faroese banknotes are also being replaced.
• A ram's horn
  The principal motif on the 50-krone note is a ram's horn printed in intaglio. The main colour of the new 50-krone note is grey-blue.
• Landscapes from Suðuroy
  The principal motif on the reverse of the 50-krone banknote is a hillside from the village of Sumba on the west side of Suðuroy. The area is a typical habitat for sheep and rams, thereby creating a natural link between the face and the reverse of the 50-krone banknote.
  The motif is reproduced from a watercolour by the artist Zacharias Heinesen (b. 1936). Zacharias Heinesen is represented at several museums and has e.g. been commissioned to decorate schools in Tórshavn. He studied art at Myndlistaskóli Íslands in Reykjavik in 1957-58 and at the Royal Academy of Fine Arts in Copenhagen in 1959-63.
• The notes in the new series are of the same height
  The dimensions of the new 50-krone banknote are 125x72 mm. The other banknotes will be of the same height, but the length increases by 10 mm for each new note denomination.
• Improved security
  The security features of the new Faroese banknotes have been improved. One element is an embedded security thread with colour change.
• Old notes are still legal tender
  Old 50-krone notes are still legal tender, but will be gradually withdrawn from circulation.
• More information
  A folder presenting information on the new 50-krone banknote will be distributed to all households on the Faroe Islands 3 and 4 July 2001. At a press conference held on the Faroe Islands today Danmarks Nationalbank presented the new Faroese banknote series. For more information see: www.nationalbanken.dk (under "Banknotes and coins").

Publication of exchange rates by Danmarks Nationalbank

11 September 2001
As from 1 January 2002 Danmarks Nationalbank will no longer publish exchange rates for the national currencies in the euro area. Since 1 January 1999 the euro has been the single currency of these 12 countries. After the introduction of euro banknotes and coins as from 1 January 2002, the previous national banknotes and coins will quickly cease to circulate. Danmarks Nationalbank will continue to publish exchange rates for the euro. The locked conversion rates of the 12 national currencies against the euro can be seen on Danmarks Nationalbank's website www.nationalbanken.dk under Euro.

In view of the expansion of trade with a number of eastern and central European countries, as well as some countries in Asia, as from 1 January 2002 Danmarks Nationalbank will publish exchange rates for 8 new countries.

Danmarks Nationalbank's exchange rates are normally fixed on the basis of information received from other central banks at 2.15 p.m. They are published for information purposes. It is not possible to either purchase currency from Danmarks Nationalbank or sell currency to Danmarks Nationalbank at the published exchange rates.

As from 1 January 2002 the exchange rates will be published at approximately 2.30 p.m.

Danish survey of turnover of foreign exchange and derivatives markets in april 2001

9 October 2001
A survey conducted by Danmarks Nationalbank has shown an average daily turnover of foreign exchange contracts in Denmark of 23.8 billion dollars in April 2001. This corresponds to a 15 per cent decline relative to an equivalent survey in 1998. Taking the dollar's general strengthening between April 1998 and April 2001 into consideration, the decline in turnover is estimated to be only 7 per cent. The decrease in turnover is assessed to be related primarily to the introduction of the euro, but also to such factors as the global trend towards a consolidation of the banking industry and the growing role of electronic broking.

Unlike turnover of foreign exchange contracts, the turnover of interest rate derivatives has increased considerably over the past three years. This especially concerns the turnover of interest rate swaps, which has more than doubled since 1998. In April 2001, the turnover of interest rate derivatives averaged 5.8 billion dollars per banking day corresponding to an overall increase of 38 per cent since 1998. Adjusted for the strengthening of the dollar, total turnover increased by an estimated 63 per cent since 1998.

The Danish survey is part of a comprehensive international survey conducted triennially since 1989. The international survey is coordinated by the Bank for International Settlements (BIS) and covers the largest market participants in 48 countries in 2001. The results of the survey are given in dollars to ensure comparability across the national surveys.

The Danish part of the 2001 survey comprises 11 banks, which are estimated to cover more than 99 per cent of the activity in the Danish foreign exchange and derivatives markets.

The survey exclusively covers contracts entered into and settled directly between two parties. Exchange-traded contracts are not included in the survey. Thus, the turnover of Danish banks is underestimated as far as interest rate derivatives are concerned.

Turnover of foreign exchange and foreign exchange derivatives

Table 1 shows turnover of foreign exchange contracts in April 2001 by type of instrument. Turnover is measured in terms of nominal amounts and is defined as the sum of transactions entered into in the month of April. The reported turnover has been adjusted for local interdealer double counting.

Table 1 Turnover of foreign exchange contracts by type of instrument

As Table 1 shows, spot and outright forward turnover has decreased noticeably since 1998, while the decrease in turnover in foreign exchange swaps has been less pronounced. This represents a continuation of the trend from 1995 to 1998. Thus, spot and outright forward turnover has declined by 32 and 36 per cent respectively from 1998 to 2001, while foreign exchange swap turnover has decreased by only 8 per cent. As stated above, the appreciation of the dollar since 1998 implies an overestimation of the decline in turnover.

The primary explanation for the decline in spot and forward turnover is presumably the introduction of the euro as a single currency for 12 EU member states. This development has brought about a natural decline in spot turnover and has also reduced the need to hedge foreign exchange risks using outright forwards and foreign exchange swaps.

However, the negative effect on the turnover of foreign exchange swaps is counteracted by the fact that foreign exchange swaps are increasingly used as a money market instrument to obtain liquidity in Danish kroner. Thus, considering the development in the dollar exchange rate, the turnover in foreign exchange swaps is estimated to be almost unchanged from 1998.

In April 2001 the trade between reporting dealers accounted for 75 per cent of total turnover in foreign exchange contracts in the Danish market. The remainder of the turnover is split almost equally between trading with other financial institutions and non-financial customers. The large proportion of turnover among reporting dealers is due especially to the fact that foreign exchange swaps, which in April 2001 accounted for 77 per cent of total turnover in foreign exchange contracts, are traded primarily in the interbank market. Another reason for the dominance of interbank trading is that any customer transaction usually leads to one or more interbank transactions, when the bank hedges its risk.

The decline in turnover between 1998 and 2001 has primarily been observed in the interbank market – especially in cross-border trading. In part, this seems to be a consequence of the trend towards a consolidation of the global banking industry.

Finally, the growing role of electronic broking is assumed to explain part of the decline in especially spot turnover. Compared to the price discovery process through traditional market making, electronic broking improves the efficiency and transparency of price discovery. Through electronic broking, price information is instantly available to traders, who thus need to enter into fewer transactions in order to obtain information on prices available in the market.

Table 2 shows that foreign exchange trading is concentrated in relatively few currencies. The dollar was involved in 83 per cent of all transactions in April 2001 and is thus the most traded currency in the Danish market. It is followed by the Danish krone and the euro, which were involved in 35 per cent and 34 per cent of all transactions, respectively. Finally, Swedish kronor and Norwegian kroner are also involved in a substantial share of the transactions.

Table 2 Turnover of foreign exchange contracts in april 2001 by currency pair

The dominance of the dollar should be seen in the light of the fact that a transaction between two currencies is often carried out by converting one of the currencies to dollars, which are then used to acquire the other currency.

Table 3 Turnover of interest rate derivatives by instrument type

Turnover in interest rate derivatives
Turnover in interest rate derivatives has increased substantially relative to 1998, cf. Table 3. Considering the development in the dollar exchange rate, the increase by 38 per cent between 1998 and 2001 is considerably underestimated.

Most noteworthy is the increase in interest rate swaps, where the average daily turnover has more than doubled since April 1998. This continues the trend from 1995 to 1998. The main reason for the rise in swap turnover is considered to be the tomorrow/next day interest rate swap – a short-term interest rate swap introduced on the Danish market in 1997.

Table 4 Turnover of interest rate derivatives in april 2001 by currency

FRA turnover has increased by 21 per cent since April 1998. Due to the large increase in interest rate swap turnover, however, the FRAs' share of the total turnover in interest rate derivatives declined from approximately 80 per cent in April 1998 to 70 per cent in April 2001.

A large proportion of the turnover of interest rate derivatives takes place via exchanges. As this survey solely concerns contracts not traded via an exchange, the turnover reported here only makes up a subset of the total turnover of Danish banks in interest rate derivatives.

The Danish market for non-exchange-traded interest rate derivatives is dominated by instruments linked to Danish interest rates, cf. Table 4. However, instruments linked to Swedish and Norwegian interest rates also account for a substantial proportion of turnover. If exchange-traded contracts had been covered by the survey, contracts in dollar and euro would account for a considerably larger share.

Like the market for foreign exchange contracts, the market for interest rate derivatives is strongly dominated by trading among reporting dealers. The increase in turnover since 1998 has taken place solely in the trading between reporting dealers, while trading with other financial institutions and non-financial customers has decreased slightly. Turnover between reporting dealers thus accounted for more than 80 per cent of the total turnover in April 2001, compared to 70 per cent in 1998.

Publication of related surveys

Today, the BIS publishes the main results of the global survey of which the Danish survey forms part. The results can be found on the BIS website at www.bis.org. Links to equivalent surveys from other countries can also be found here.

Further to the turnover survey, a survey of amounts outstanding at end-June 2001 has been conducted. Once the Danish data on outstanding contracts has been processed – probably in November 2001 – Danmarks Nationalbank will issue a Special Report with a detailed account of both the turnover survey and the survey of amounts outstanding.

The BIS plans to publish a detailed summary of the results of the global survey of both turnover and amounts outstanding in early 2002.

New "home banking system" for the banks at Danmarks Nationalbank

19 November 2001
Danmarks Nationalbank has developed a new RTGS payment system, Kronos, used by the banks to send payments to each other via their accounts at Danmarks Nationalbank. Kronos, the new "home banking system" for the banks, is launched today. It offers 130 financial institutions an advanced well-integrated payment system.

Kronos replaces the 20-year-old DN Inquiry and Transfer System, as well as the system for euro payments, Debes, as the backbone for payment and settlement systems in Denmark. Kronos thus settles payments in both kroner and euro, and is also the Danish interface to the European payment system Target.

Kronos is a state-of-the-art system that has been developed in close co-operation with the participants. Kronos is designed to facilitate the participants' liquidity management and introduces a modern user interface based on the latest information technology. In addition, a number of advanced queuing facilities and liquidity-saving mechanisms are implemented.

Kronos offers a range of modules to the participants. In addition to a mandatory module for payments in kroner, the participants can choose access to payments in euro, and whether to communicate via the international payments network, Swift. This enables participants to fully automate their processing of payments.

The development costs total kr. 20 million. In accordance with international practice, Kronos is financed by its users.

With the introduction of Kronos the Danish payment systems infrastructure is ready for CLS (Continuous Linked Settlement), the coming international currency settlement system.

The Statutory Basis for the Financial Sector

Directives, etc.

Financial Services Action Plan
In order to strengthen the internal market for financial services the European Commission launched its Financial Services Action Plan in 1999. The Action Plan has three strategic objectives:

• Inexpensive and plentiful capital for enterprises
• Enhanced consumer protection
• Stable financial enterprises

The Action Plan states priorities for the implementation of the internal market. It includes 42 proposals for directives, which must, by decision of the European Council, be finally implemented in the member states by 2005, except as regards the securities market, where the implementation date is 2003. At present 25 of the proposals have been finally adopted. In connection with the Action Plan the European Commission issued a numberofproposalsfor directives in 2001, some of which are described below.

New decision-making procedure for regulation of securities markets in the EU
At the EU summit in Stockholm in March 2001 a resolution was adopted to support the recommendations of the Lamfalussy Report. The report recommends amendment of the decision-making proced-ure for regulation of the EU securities market. The purpose of the amended procedure is to enable more efficient regulation in order to match the rapid development in the securities markets. In future, the EU Council of Ministers and the European Parliament will in principle only be engaged with the central principles in relation to such regulation, whereas the technical implementation measures will be left to a newly-established European Securities Committee. In addition, a Committee of European Securities Regulators has been established which is inter alia to advise the European Commission and the European Securities Committee on supervisory issues in relation to securities, and furthermore to ensure uniform implementation of the rules. In February 2002 a common understanding was achieved between the European Commission and the European Parliament on the handling of the decision-making process. Initially the new powers of implementation are limited to a period of four years.

Proposal for a directive on supplementary supervision of credit institutions, insurance undertakings and investment firms in a financial conglomerate (the Financial Conglomerates Directive)
In April 2001, the European Commission presented the above proposal for a directive. It has taken around 18 months to prepare the proposal, which is based on a report from an ad-hoc working group set up by the Banking Advisory Committee, the Insurance Committee and the High Level Securities Supervisors Committee, presented in December 2000.

The directive proposal is inspired by a number of recommendations from the Joint Forum on Financial Conglomerates from 1999 regarding the supervision of financial conglomerates

The current financial directives regulate the supervision of individual companies and groups within each area of the financial sector. However, trends in the financial markets have led to the formation of conglomerates whose activities are diversified into various areas of financial sectors.

The directive proposal is a superstructure to the regulation of financial groups within the individual sectors (credit institutions, insurance companies, etc.) and fills a gap in the existing EU legislation. The proposal also calls for harmonisation of the directives relating to the individual sectors which are prerequisite to the objective of the financial conglomerates directive. It should also be ensured that no conglomerate conducts financial activities that are not covered by current EU legislation.

The proposal covers the following areas:

• Definition of a financial conglomerate
• Rules to prevent multiple gearing (i.e. simultaneous use of the same capital in several entities of the conglomerate)
• New methods to calculate the solvency position at the level of the entire conglomerate
• Intra-group transactions
• "Fit and proper" test of the conglomerate's management
• Principles for appointment of a coordinator of supervisory activities
• Regulation of parent entities based outside the EU

The proposal is currently being discussed by a working party under the Council, which has completed its first reading of the proposal. This work will continue in 2002.

Proposal for at directive on financial collateral arrangements (the Collateral Directive)
In March 2001 the European Commission presented its proposal for a directive on financial collateral arrangements. The objective of the proposal is to support the special types of collateral which have emerged in the financial markets in recent years, e.g. by reducing the legal insecurity related to the provision of cross-border collateral.

Under the proposal, financial collateral arrangements must be respected by third parties too, including the estate of the collateral provider. The proposal covers central banks, public authorities and banks subject to supervision and their counterparties, and solely relates to the provision of collateral as certain forms of securities and as cash.

The proposal allows the contracting parties to arrange for the collateral taker to have the right of use of the collateral, and for the collateral provider to have the right to provide equivalent collateral. In addition, the proposal enables the parties to arrange for the provision of additional (top-up) collateral as a result of changes in the mark-to-market value of the collateral. In addition, the proposal allows for speedy realisation of collateral and acknowledgement of close-out netting arrangements. Finally the proposal includes a provision on the lex rei sitae rule, which states that all issues relating to book-entry securities covered by a financial collateral arrangement shall be governed by the law of the country in which the relevant account is maintained, regardless of whether that country is a member state.

Political agreement on the proposal was reached at the meeting of the Ecofin Council in December 2001, so that a common position on the proposal may be adopted in the first half of 2002.

Proposal for amendment of Directive 85/611/EEC in the field of undertakings for collective investment in transferable securities (UCITS)
In July 1998 the European Commission submitted two separate proposals to amend the current directive from 1985.

As regards the "product proposal", political agreement was reached at the meeting of the Ecofin Council in October 2000. The "management company directive" was finally adopted at the meeting of the Ecofin Council in December 2001.

The proposals include such issues as approval, supervision, investment policy and transparency requirements of UCITS offering their shares for sale to the public and whose sole objective is to invest in securities. The first proposal focuses on the product offered. The second proposal focuses on the provider. The objective of the "product proposal" is to adapt the existing UCITS directive to the market by extending its scope to include investment institutions investing wholly or partly in other liquid financial assets than securities.

The objective of the "management company proposal" is to strengthen the internal market in the UCITS field by introducing regulation of management companies in line with the current regulation of other providers of financial services (banks, insurance companies and investment companies). A management company can thus obtain an EU passport giving it the right to take up business in other member states via establishment or free exchange of services. The current restrictions on the activities of management companies are relaxed to allow the management companies to undertake individual portfolio management and other accessory activities. Finally, simplified prospectuses are introduced.

Regulation on cross-border payments in euro
At the Internal Market Council meeting on 26 November 2001 political agreement was reached on the proposal for a regulation on cross-border payments in euro.

The objective of the regulation is to harmonise charges for cross- border payments in euro with charges for domestic transfers. Originally the regulation was to have entered into force and taken effect on 1 January 2002, the same day as euro banknotes and coins were introduced. Officially the regulation entered into force on 1 January 2002, but it does not take effect until 1 July 2002 for debit cards and 1 July 2003 for account-to-account transfers.

The background to the regulation is that surveys made by the European Commission have shown that cross-border payments are still more expensive than domestic payments. In the opinion of the European Commission, the banking sector has failed to comply with requests voluntarily to reduce the costs of cross-border payments in euro, and consequently the European Commission has proposed legal intervention via a regulation. This approach has been chosen to avoid the need for implementation measures in the individual EU member states.

The regulation will apply in all EU member states, including Denmark, Sweden and the UK, even though they are not part of the euro area. In principle transfers in these countries' currencies are not included, but the out-countries may "subscribe to" the regulation with regard to their national currencies, so that the regulation also applies to cross-border payments in those currencies. This opt-in clause for non-participating member states was introduced at the request of Denmark, among others.

The provisions of the regulation apply to cross-border payments of up to euro 12,500. From 1 January 2006 the upper limit will be raised to euro 50,000.

The regulation covers actual transfer charges, but not other charges related to the transfer such as fees for currency conversion.

As from 1 July 2002 member states shall also remove any national reporting obligations relating to the balance-of-payment statistics for cross-border payments up to euro 12,500. This provision has been introduced because one of the reasons for the costly manual handling and resulting high charges has been the obligation imposed on banks, etc. by the member states to report cross-border payments for use in the balance-of-payment statistics. A possible increase of the limit to euro 50,000 will be considered in connection with the amendment of the regulation by 1 July 2004 at the latest.

Acts, etc.

Financial Business Act
On 22 May 2001 the Folketing (Parliament) adopted the Financial Business Act, which is a joint act relating to banks, mortgage-credit institutes, insurance companies and investment companies (financial undertakings).

The Financial Business Act constitutes the first part of the structural reform recommended by the Committee on the Financial Sector after the Year 2000.

On the basis of the greater integration of financial markets, including the formation of financial conglomerates, it has been deemed necessary to implement a new structure for the financial supervisory acts. The aim is to ensure that similar financial products are treated in the same way and to introduce a number of measures to simplify and modernise this area. This has been achieved by compiling related provisions from the Act on Danish Commercial Banks and Savings Banks, the Act on Insurance Companies, the Act on Investment Companies, the Mortgage Credit Act and the Act on Company Pension Funds into the Financial Business Act.

The Act compiles the supervisory provisions and other statutory areas where there is a high degree of concurrence in the financial acts. The provisions have been harmonised in a number of areas, and the individual provisions have been updated.

The Act regulates the following areas:

• Definitions
• Rules on good practice
• Management rules
• Group rules
• Accounting rules
• Rules of supervision

The sector-specific provisions of the various financial acts will remain in force. However, the intention is to implement the second part of the structural reform, where the other elements of the financial acts will be reviewed in order to achieve an even more uniform structure, as well as further simplification of e.g. the provisions on the establishment of financial enterprises, permission to carry on financial activities, solvency, mergers, etc.

In connection with the compilation, the accounting provisions have been amended to take into account the latest developments in the accounting field, including the EU's accounting strategy based on international accounting standards (IAS) issued by the International Accounting Standards Committee (IASC). Moreover, the dual auditor system has been abolished.

During the Folketing (Parliament) hearings in the spring of 2001 the bill was debated intensely and a number of amendments were implemented, notably the establishment of the Financial Business Council. The Financial Business Council is described in further detail on p. 56.

Electronic Money Institutions Act
On 22 May 2001 the Folketing (Parliament) adopted the Electronic Money Institutions Act. The act implements the directive on the taking up and pursuit of business as an electronic money institution. The directive harmonises member states' legislation on the pursuit and supervision of the business of electronic money institutions. This entails that such institutions are subject to financial supervision and to the rules on the "EU passport". Issuers of electronic money are subject to simple, more lenient capital requirements, but also to more restrictive placement rules than credit institutions. The background is the characteristic balance-sheet structure of such institutions whereby the liabilities consist of unredeemed electronic money. Very liquid placement of assets is an equivalent requirement. Unlike the directive, the act operates with a maximum limit of euro 300 for issue of electronic money by electronic money institutions. This should be viewed against the background that electronic money can be seen as an electronic substitute for coins and banknotes. Furthermore, the act applies a lower limit to the amounts to be exempted from the scope of the directive. The Act is based on the previous directive relating to issuers of prepaid charge cards.

Act to amend the Act on Danish Commercial Banks and Savings Banks, etc., the Mortgage Credit Act and the Act on Investment Companies
With the Act to amend the Act on Danish Commercial Banks and Savings Banks, etc., the Act on Investment Companies and the Mortgage Credit Act adopted by the Folketing on 22 May 2001, it became possible for credit institutions and investment companies to use internal models to calculate the capital adequacy requirement for market risk exposure. Under the CAD ll directive of 1998 the authorities may implement legislation allowing financial institutions to use internal models. The background to this amendment is that certain institutions have developed advanced Value-at-Risk (VaR) models for more accurate measurement of market risks in comparison to the standard method previously only available to the institutions. The option to use internal models gives the banks a stronger incentive to develop risk management models.

Another element of the amendment act, which was also adopted on 22 May 2001, was a specification that subordinate capital in a credit institution is not to be included in the solvency assessment of the institution. In other words, even if an institution cannot meet its obligations in terms of subordinate capital, this is not sufficient in itself for the institution to be regarded as insolvent. This amendment was recommended in the report of the Committee on the Financial Sector after the Year 2000.

Consultation responses

Concerning the European Commission's proposal for a regulation of cross-border payments in euro.

On 17 September 2001 Danmarks Nationalbank submitted the following consultation response:

The Commission's proposal raises the immediate issue that matters relating to the euro-area currency are extended to the entire community.

Danmarks Nationalbank has not conducted an assessment of the application of Article 95 (1) as the legal basis for the regulation.

According to the Commission the objective of the proposal is to reduce banking charges for cross-border payments in euro to a level which is in line with the charges applying at the national level. It is thus the intention to lay down legal provisions to the effect that charges for cross-border payments of up to euro 50,000 will be the same as the charges for domestic payments in euro. In addition, the Commission proposes a number of measures aimed at easing cross-border payments in euro. The retail payments infrastructure is to be improved by enforcing mandatory use of certain standards, and the Commission also wishes to exempt banks from some of the tasks related to reporting information on clients' cross-border payments to the national statistical authorities.

In principle Danmarks Nationalbank finds that price regulation of this area should also be left to the market, and that price regulation via legislation should be avoided whenever possible.

It is a fact that cross-border retail payments are subject to varying and at times considerable charges, which is not expedient. This can be explained partly by the fact that cross-border payments are more expensive for banks to handle than domestic payments, due to the reporting obligations and the lower degree of automation.

At the European level, work is in progress to make cross-border retail payments less expensive and more efficient than is the case today. It might therefore be expedient to wait and see whether this work, which involves dialogue between authorities and market participants, might soon result in a significant improvement in the market for cross-border payments in euro.

One consequence of the Commission's proposal might be that for payments originating in countries with inefficient domestic payment systems it would be possible to levy higher charges on cross-border payments than for payments from countries where domestic payment systems are efficient. This could reduce the incentive to introduce efficient domestic payment systems.

Another consequence of the proposal might be that cross-border payments, in view of the extra costs they entail, would impose losses on the bank, for which reason some players might choose to discontinue this service.

Finally, the Commission's proposal to exempt banks from reporting any information relating to payments below euro 50,000 after 1 January 2004 will lead to an unacceptable deterioration in the data basis for compilation of the external balance of payments.

It is of great importance that a reliable Danish balance of payments can be compiled. The reports filed by the banks to Danmarks Nationalbank about their own and their clients' cross-border payments are a central source of the data on which Statistics Denmark's compilation of the balance of payments is based. Implementation of the proposal therefore requires that the compilation method is changed so that information is instead collected directly from companies with external transactions. It would not be realistic to introduce such a change within the stated time frame.

Danmarks Nationalbank's Consultative Document of 29 may 2001

Danmarks Nationalbank's comments on the january 2001 consultative document "the new basel capital accord"

Danmarks Nationalbank welcomes the opportunity to respond to the Committee's proposal. Danmarks Nationalbank supports the general objectives stated in the Basel Committee's proposal and is in agreement with the general thrust of the proposed three-pillar approach.

The first pillar: minimum capital requirements

Danmarks Nationalbank supports the introduction of a menu of approaches providing banks incentives to improve their internal control and risk management systems.

Credit risk
Standardised approach
Danmarks Nationalbank welcomes that the standardised approach has been made more risk sensitive compared to the June 1999 proposals. However, as the number of externally rated companies in Denmark is very limited, the recognition of external ratings in general is less useful. It is therefore crucial that level-playing field is ensured in the recognition of external and internal rating systems.

It is proposed that national supervisory authorities are responsible for the recognition of external assessment institutions based on a set of criteria. It is important that this process is transparent and ensures consistency in order to secure level playing field.

Internal ratings-based approach
The internal ratings-based (IRB) approach should be framed in a way that could potentially be applied by all banks, not just large or sophisticated banks. The development of an evolutionary approach to internal ratings to a certain extent meets this concern. However, in order to ensure level playing field and financial stability we would recommend that further efforts be made to make the requirements for the use of the internal ratings-based approach more clear.

The use of the internal ratings-based approach may significantly increase the risk of pro-cyclical effects in capital requirements. It is therefore important that banks' evaluation of capital adequacy is forward-looking and takes into account the effect from a full economic cycle so that appropriate capital buffers are in place to absorb cyclical risks.

As the range of risk weights is significantly wider in the IRB approach compared to the standardised approach there is a risk that only banks with low-risk borrowers apply the IRB method while banks with high-risk borrowers maintain the standardised approach. Thus, accuracy and consistency with the revised standardised approach should be ensured.

The proposal that a bank using the IRB approach for some of its exposures is required to adopt the IRB approach across all of its exposures within a reasonable short period of time seems inappropriate. For smaller banks that may have one or more exposure classes for which they have developed an IRB approach, the cost of developing an IRB approach for the remaining exposures might be very high in relative terms. Therefore, if the remaining exposures are not material, it should be possible to exempt them from the IRB approach. Furthermore, it may not be relevant for smaller banks to develop internal ratings on exposures such as other banks or sovereigns, but instead use external ratings. However, in general it is important that cherry-picking opportunities are prevented in the adoption of the IRB approach.

Operational risk
In general, attention should be paid to the impact of the capital charge for operational risk on different categories of institutions, especially to smaller banks that are unlikely to benefit from a reduction in their capital charge for credit risk in the new framework.

It is important that the capital charge for operational risk contains incentives to better control this type of risk. Regarding the Standardised Approach the calibration of the beta-values should take differences in operational risk features into account. Business lines where the main risk features have already been covered by capital charges on credit or market risk should be given smaller beta factors.

The second pillar: the supervisory review process

With the introduction of the second pillar, the role of supervisors is enhanced markedly. The supervisory review process is based on the assumption that supervisory authorities to a larger extent take qualitative factors into account.

If individual minimum capital requirements above the 8 per cent minimum are introduced, Danmarks Nationalbank is of the opinion that these should be based on clear objective criteria. This is important in a legal context as well as in order to ensure a level playing field.

Danmarks Nationalbank believes that the decision to treat interest rate risk in the banking book under Pillar 2 instead of under pillar 1 is inappropriate. Danmarks Nationalbank believes that capital charges for interest rate risks should cover both the trading book and the banking book, e.g. on an integral basis.

A lack of appreciation of cyclical risks and the possible point-in-time status of banks' internal risk control systems rise the concern of the pro-cyclical nature of the capital regulation. Therefore supervisory authorities should pay attention to the adequate stability and conservatism of banks' internal ratings and should be given the possibility to use methods that ensure cyclical stability.

The third pillar: market discipline

Danmarks Nationalbank supports an increasing role for market discipline and believes that increased transparency will contribute to soundness in the financial system and enhance financial stability. However, it is important that the same rules apply to all banks in order to safeguard equality in terms of international competition. This will furthermore contribute to transparency concerning convergence in supervisory practices.

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Version 1.0 March 2002 Nationalbanken.
Published by Danmarks Nationalbank March 2002, http://www.nationalbanken.dk/