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Report on Danmarks Nationalbank's AccountsThe Nationalbank's financial risks mainly comprise market risks. The market risk is related primarily to the interest-rate and foreign-exchange sensitivity. The interest-rate sensitivity was augmented during the year. Euro-denominated assets account for the major part of the foreign-exchange sensitivity. The credit risk is very small, 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 accounts for 2000 show a profit of kr. 5.7 billion, compared to kr. 1.5 billion in 1999. The improvement is related mainly to the increase in value adjustments by kr. 4.4 billion to kr. 1.3 billion. Of the profit for the year, kr. 3.1 billion is payable to the central government. The Nationalbank's net capital has increased by kr. 2.7 billion to kr. 44.4 billion in 2000. The Nationalbank's management of financial risksThe Nationalbank holds financial assets and liabilities. This entails that the Nationalbank is exposed to a number of financial risks which can affect the financial result. The principal assets are foreign deposits and securities, domestic bonds 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 Nationalbank is primarily exposed to market risks and to a lesser degree to other types of risk, e.g. credit risks. Market risk Generally, a distinction is drawn between sensitivity and risk. Sensitivity is the extent to which the Nationalbank will incur losses on a given change in a specific risk factor, such as the interest rate. The compilation of the foreign-exchange sensitivity is based on market values of foreign-exchange outstandings. Interest-rate sensitivity indicates the capital loss to the Nationalbank as a consequence of an increase in interest rates by 1 percentage point. On compiling the risk the probability of losses is evaluated by combining sensitivity with the probability of a change in the risk factor concerned. For example, Value-at-Risk is used to compile the total market risk. It indicates the maximum loss that with a given probability can be expected within a given time frame. Interest-rate risk At the beginning of 2000 the interest-rate sensitivity of the domestic and foreign portfolios was augmented by kr. 0.5 billion to kr. 3.4 billion, cf. Table 10. Table 10 Interest-rate sensitivity of the nationalbank
The sensitivity to changes in interest rates of the foreign portfolio was 63 per cent of the total interest-rate sensitivity at the end of 2000. The sensitivity to changes in Danish interest rates can be related to the Nationalbank's portfolio of securities, comprising government bonds, Danish Ship Finance bonds, and municipal- and mortgage-credit bonds. Mortgage-credit bonds are usually callable, and the compilation of the interest-rate sensitivity of these bonds takes the bonds' call option into account. Foreign-exchange risk The exchange-rate risk on the foreign-exchange-denominated assets is limited by forward sale of dollars, sterling and yen 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 2000 the Nationalbank held pound sterling assets for kr. 9 billion, but had sold sterling forward for kr. 7 billion. The total net sterling outstandings thereby amounted to kr. 2 billion in net terms. The Nationalbank's foreign-exchange sensitivity almost entirely concerns the euro, cf. Table 11. The bank's profit is thus to only a moderate degree affected by fluctuations in the krone's exchange rate vis-à-vis the dollar, yen and pound sterling. Table 11 Foreign-exchange exposure of the nationalbank
The Nationalbank's foreign-exchange outstandings had fallen by kr. 38 billion to kr. 134 billion at end-2000. This decline is related mainly to the foreign-exchange reserve. Since 1992 the Nationalbank's foreign-exchange risk has been subject to coordinated management with the foreign-exchange risk of the central government's foreign debt. 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 euro. In view of the Danish fixed-exchange-rate policy the euro is found to be the currency entailing the lowest risk. As the exchange-rate risk on the central government's liabilities and the Nationalbank's assets is primarily in euro, the coordinated management was discontinued at the beginning of 2001. It is still the objective not to raise loans in one currency and then place the proceeds in another currency and thus not to expose the central government to a considerable indirect exchange-rate risk via the Nationalbank. Calculation of market risk At the close of 2000 the Nationalbank's VaR was kr. 3.2 billion[1], cf. Table 12. There was thus only a 5 per cent probability that during the coming year the Nationalbank will have total losses exceeding kr. 3.2 billion. At the close of 1999 VaR was kr. 4.1 billion. The decrease in VaR is related to the reduced volatility of the financial markets in 2000 compared to 1999. Table 12 The nationalbank's value-at-risk
The exchange-rate risk on the euro is not a traditional market risk, since the Nationalbank not only may, but is also obliged to, influence the krone/euro rate. The Nationalbank will only sustain a loss if the krone strengthens against the euro. It can therefore be of interest to evaluate VaR without the exchange-rate risk related to the euro. VaR excluding the exchange-rate risk on the euro is kr. 2.8 billion. Elimination of the exchange-rate risk related to the euro thus entails a decrease in VaR by 10 per cent. Liquidity risk The placement of the domestic securities portfolio does not take the liquidity aspect into consideration. The Nationalbank also has access to liquidity via the central government's Commercial Paper programme amounting to 12 billion dollars. Moreover, there is an opportunity to borrow at the ECB in accordance with the ERM II agreement. Credit risk To reduce the credit risk the Nationalbank seeks to spread its assets among counterparties with a high credit standing. Moreover, to a large extent collateral is required. The credit risk is therefore very small. The credit risk on the foreign claims, i.e. claims on 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 with government bonds as collateral are used to a great extent. Should a repo counterparty be subject to compulsory liquidation, the Nationalbank's deposit is covered by the collateral provided. The Nationalbank's foreign bond holdings are issued or guaranteed[2] 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. The credit risk on domestic assets is reduced via collateral requirements. When Danish banks borrow at the Nationalbank, they provide bonds as collateral. This applies to loans related to the monetary-policy operations, the banks' intra-day credits and cash depots. On placement of the domestic securities portfolio great weight is attached to the high credit standing of the issuers. The securities portfolio thus almost exclusively comprises government bonds, mortgage-credit bonds and Danish Ship Finance bonds. Since approximately 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, the credit risk is very small, cf. Table 13. Table 13 Total credit exposure on the foreign-exchange reserve andthe domestic securities portfolio, etc., end-2000
Presentation of the Nationalbank's accountsThe Nationalbank's Accounts with notes are shown on pp. 131-139. The accounts for 2000 have been prepared in accordance with the same accounting policies as in the previous year. The accounts reflect that the Nationalbank issues banknotes and coins, administers the foreign-exchange reserve and functions as banker to the banks and the mortgage-credit institutes, and to the central government. In 2000 the profit from financial items was kr. 6,299 million and thereby kr. 4,366 million higher than in 1999. The significant increase primarily reflects positive value adjustments of kr. 1,343 million, compared to negative value adjustments of kr. 3,081 million in 1999, equivalent to an improvement by kr. 4,424 million in total. After expenses of kr. 556 million and other expenditure on ordinary operations of kr. 20 million, the profit for the year was kr. 5,724 million, or kr. 4,252 million more than in 1999. The balance sheet has decreased from kr. 281.8 billion to kr. 237.0 billion, primarily reflecting the bank's sales of foreign exchange. The profit and loss account Income from interest on foreign assets rose by kr. 296 million to kr. 5,815 million. The increase is a consequence of generally higher interest rates than in 1999, while the foreign-exchange reserve on average was kr. 20 billion less in 2000 than in 1999. Net interest to banks and mortgage-credit institutes (interest on deposits and certificates of deposits less interest on lending) was kr. 983 million, compared to kr. 1,148 million in 1999. The rates of interest for certificates of deposits and lending are identical, while the rate of interest for deposits is lower. The interest rates have all been significantly higher than the equivalent rates for 1999. The decrease in the total net interest expenditure of kr. 165 million is related to the fact that the average net position of the banks and mortgage-credit institutes vis-à-vis the Nationalbank has been significantly lower in 2000 than in 1999, cf. p. 38. This is, however, partly setoff by higher interest rates. The Nationalbanks interest expenditure on the central government's deposit rose by kr. 364 million to kr. 2,192 million. The deposit was on average lower than in the preceding year, while the discount rate, which is the rate of interest on the deposit, was higher. Interest on loans to other borrowers fell by kr. 12 billion to kr. 175 million. The change can be attributed to a decrease by kr. 72 million because the Danish Export Finance Corporation redeemed all loans during 1999, and an increase of kr. 60 million from currency swaps with theDanish Ship Finance. The increase of kr. 60 million is related mainly to the settlement of income from interest at a higher dollar rate than in 1999. Interest to other depositors, etc., rose by kr. 84 million to kr. 294 million, primarily as a consequence of the fact that the Nationalbank took over additional amounts under the existing commitments vis-à-vis the Danish Ship Finance, i.e. index-linked loans for a total value of kr. 3,066 million in 1999 and kr. 500 million in 2000, cf. also the 1997 Annual Report, p. 96. Interest and dividend on bonds and shares, etc. are by and large unchanged at kr. 2,563 million. Value adjustments, etc. Value adjustment of the Nationalbank's gold stock gave a gain of kr. 116 million, which is related to a an increase in the dollar by 8.4 per cent, while the price of gold in dollars fell by 5.4 per cent. The value adjustment of foreign-exchange positions comprises the value adjustment of the foreign-exchange reserve, as well as value adjustment of unsettled foreign-exchange contracts, currency and interest-rate swaps, domestic foreign-exchange balances, and the liability: counterpart of Special Drawing Rights (SDR) allocated by the IMF. The value adjustment gave a gain of kr. 1,126 million, which can be attributed to an exchange-rate gain of kr. 280 million and a market-value gain of kr. 846 million. The exchange-rate gain is related primarily to an exchange-rate gain in euro and SDR and an exchange-rate loss in dollar. The value adjustment of (domestic) bonds and shares gave a total gain of kr. 101 million, of which the gain on bonds was kr. 68 million, while the gain on sale of shares in Dansk Udviklingsfinansering A/S realised kr. 39 million. This was equivalent to the sales proceeds, since the Nationalbank's share portfolio was included in the accounts at kr. 1 per shareholding. Moreover, share acquisitions in VP A/S-The Danish Securities Centre and SWIFT were written down by a total of kr. 6 million, to kr. 1 per shareholding. The market-value gain on domestic and foreign bonds can be related to the general decrease in long-term interest rates, which is set off partly by 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. Expenses Staff expenses fell by kr. 5 million to kr. 293 million. Of this decrease kr. 9 million, equivalent to 3.2 per cent, constitutes an increase in wages, salaries and fees, and other staff expenses, and kr. 14 million a decrease in the provision carried as expenditure for support and severance schemes. Other expenses rose by kr. 16 million to kr. 263 million, equivalent to an increase of 6.5 per cent. Other expenditure on ordinary operations Result for the year The balance sheet Foreign assets 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) Loans, etc. Bonds and shares, etc. Banknotes and coins in circulation Foreign liabilities Counterpart of Special Drawing Rights (SDR) allocated by the IMF Deposits, etc. Certificates of deposit Central government Net capital Copenhagen, end-February 2001 Bodil Nyboe Andersen Torben Nielsen Jens Thomsen At its meeting of the Board of Directors held on 20 March 2001 the Board of Governors reported on the activities of the Nationalbank in 2000. The report was noted. The Nationalbank's accounts for 2000 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] VaR is calculated on the basis of estimated volatilities and correlations between relevant risk factors for the last 160 days. VaR is determined by combining these estimates with the portfolio composition at end-2000. The implementation of new software in 2000 to calculate VaR has made it possible to include the gold stock in the VaR calculations. [2] The government-guaranteed securities include securities with an implicit government guarantee. | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
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Version 1.0 March 2001 Nationalbanken. |