The Domestic Financial System
As an element of the Nordic stock-exchange cooperation, NOREX, in June 1999 the Copenhagen Stock Exchange introduced the joint trading system, SAXESS, initially for stock trading.
The banks' total profit for the year rose to just over kr. 14 billion. Provisions and losses on debtors fell by just under 5 per cent. The mortgage-credit institutes are also expected to present a favourable annual result for 1999. The assets of investment associations showed strong growth in 1999.
The Bond Market
The development in interest rates on the Danish bond market is described on p. 38. The outstanding volume of domestic krone-denominated bonds listed on the Copenhagen Stock Exchange rose in 1999 from a nominal amount of kr. 1,875 billion (161 per cent of GDP) to kr. 1,908 billion (157 per cent of GDP). The circulating volume of mortgage- credit bonds increased by kr. 43 billion, while the circulating volume of government bonds and other bonds fell by a total of kr. 10 billion during the year. In 1999 mortgage-credit bonds for kr. 169 billion were redeemed prematurely, primarily during the 1st half-year. This activity declined in the 2nd half-year as a consequence of a rising level of interest rates. For comparison, extraordinary redemptions totalled kr. 236 billion in 1998.
In 1999 non-resident investors acquired krone-denominated bonds for a net amount of kr. 7 billion. They sold government bonds for kr. 1 billion and bought mortgage-credit bonds for kr. 8 billion. Non-residents' holdings of krone-denominated bonds still predominantly comprise government bonds, but their holdings of mortgage-credit bonds have been increasing.
The minimum coupon rate was held at 4 per cent in 1999 and is likewise fixed at 4 per cent for the 1st half of 2000. Since the minimum coupon rate might adversely affect the efficiency of the financial market, the Ministry of Economic Affairs' Committee on "the Financial Sector after the Year 2000" [1] has recommended the abolition of the minimum-coupon-rate rule. A bond complies with the minimum- coupon-rate rule with the designation "blue-stamped" [2] if the coupon rate is greater than or equivalent to the minimum-coupon rate applying for the period during which the bond is issued. On an increase in the minimum-coupon rate issues in many open series will normally be discontinued. The circulating volume may as a consequence be smaller than desired, so that liquidity deteriorates. This can contribute to locking effects and distortion in the market's pricing of the bonds.
To follow up on the Ministry of Economic Affairs' "Outline National Changeover Plan: Changeover to Euro in Case of Danish Participation – Danmarks Nationalbank", cf. p. 151, in the summer of 1999 the Nationalbank established a working group to consider the technical consequences for the Danish bond market if Denmark decides to adopt the euro. The working group [3] primarily considered the issue of redenomination of circulating bonds from kroner to euro.
The report of the working group was published at the end of January 2000 [4]. The report emphasises the need for national legislation based on EU regulations. The report recommends that redenomination be based on each bond holder's holdings of a given bond series. This is the "bottom-up" method which most of the present euro area member states applied on their adoption of the euro. It is also recommended to round all amounts to the nearest eurocent on redenomination. Finally, the simultaneous redenomination of government and mortgage-credit bonds is recommended on joining the euro area, while it should be possible to redenominate corporate bonds during a specified period. Since the capacity of the Danish Securities Centre's computer systems is not unlimited, redenomination around a turn of the year will require one or more extraordinary closing days of the VP system.
Measures in the Stock-Exchange Area
Nordic stock-exchange cooperation
As an element of the formalised cooperation, NOREX, between the Copenhagen Stock Exchange and OM Stockholmsbörsen in June 1999 the Copenhagen Stock Exchange introduced the joint trading system, SAXESS, for stock trading. SAXESS is expected to be expanded to include bond and derivative trading functions in the autumn of 2000.
In November 1999 the Copenhagen Stock Exchange, OM Stockholms-börsen and Oslo Børs signed a declaration of intent concerning Oslo Børs' participation in NOREX. The negotiations are expected to be finalised at the beginning of 2000, and Oslo Børs is expected to implement the SAXESS system during the 2nd quarter of 2001. Moreover, negotiations have been initiated with the stock exchanges of the three Baltic states and Iceland concerning participation in NOREX.
European stock-exchange cooperation
In May 1999 the stock exchanges in Paris, Madrid, Milan, Amsterdam, Brussels and Zürich joined the strategic alliance between the stock exchanges of Frankfurt and London to establish a joint trading system for the largest European companies. However, the alliance encountered problems such as disagreement on joint technology. The objective of a joint trading system has been suspended until further. Instead, from November 2000 the alliance will establish a new joint electronic system which gives access to the trading systems of the participating stock exchanges. However, on the transition to the year 2000 a proposal by the Frankfurt Stock Exchange for the establishment of a pan-European stock-exchange system for the entire European financial market may impede the intended alliance between the eight European stock exchanges. The new stock-exchange system would include all areas related to stock-exchange trading and financial markets, including currency trading, registration and settlement systems.
New disclosure requirements for stock-exchange-listed companies
In October 1999 the Copenhagen Stock Exchange introduced a new set of rules to be met by issuers of securities listed on the Copenhagen Stock Exchange. The new rules define the information to be published by the companies subject to the disclosure requirements. The objective of the new rules is to ensure a reporting level equivalent to international standards since interest in investing in Danish stock-exchange-listed securities depends on such factors as the level of information provided by the issuers. The NOREX cooperation has contributed to emphasising the need for harmonisation of the rules.
The new rules reinforce the recommendation to publish quarterly reports. The Copenhagen Stock Exchange expects that in the near future a large proportion of the KFX companies will announce their intention of following the Stock Exchange's recommendation to adhere to "best practice". In addition, the new rules impose the requirement that every notification must state the company's own evaluation of the consequences of the information provided, and that accounts and preliminary statements must include the expectations of the board and management of the company's financial development in the current financial year.
In order to match the deadlines for the presentation of accounts to international practice the preliminary statement of annual accounts must be published no later than three months after the close of the financial year, in contrast to the previous deadline of five months. Finally, the companies must publish a stock-exchange calendar for the coming year stating the dates of publication of interim statements.
In addition, the rules tighten the requirements of internal regulations for trading in the companies' shares and state that the companies must publish details of any incentive schemes for the company's board and management. New requirements have also been introduced concerning the publication of transactions between closely related parties. Finally, the companies must plan their investor relations activities with due observance of the new rules and according to the principle of equal treatment of investors.
New share index
In order to increase focus on small and medium-sized stock-exchange- listed companies on 7 January 2000 the Copenhagen Stock Exchange established a new share index, the KFmX index. The index comprises approximately 230 shares not already included in the KFX index which together represent 21 per cent of the total market value on the
Copenhagen Stock Exchange.
The KFX index will continue to be the benchmark index, however, since the 20 shares in the KFX index account for approximately 67 per cent of the total market value. The Copenhagen Stock Exchange has decided to review the KFX index every 6 months in accordance with the international standard.
Restructuring of the Danish Securities Centre as a Limited Liability Company
The Danish Securities Centre, VP, is a self-governing institution with a Board of Partners. The partners, which are all represented on the Board, are securities traders, the mortgage-credit sector, investors, the Nationalbank and issuers of shares.
In 1999 the Board of VP appointed a committee to consider various models for restructuring as a limited liability company.
The objective of a restructuring is to establish more business-oriented management of VP. The restructuring will enable VP to join an international cooperation body and should be viewed as the first step towards creating a more dynamic and market-oriented institution.
Statutory Framework for the Financial Sector
Report on the Financial Sector after the Year 2000
In August 1997 the government appointed a Committee on "the Financial Sector after the Year 2000". The remit of the committee was to analyse and assess the technological and market-related development in the financial sector, and to identify the requirements for restructuring faced by the sector.
The committee published its report in September 1999 [5]. The main challenges identified were greater international competition, the third stage of EMU, information technology as a competitive parameter, "disintermediation" [6], the requirement of transparency, the requirement of adaptability and cost efficiency, and the adjustment of financial legislation.
The committee found that public measures are required in the following main areas:
- Forward orientation of financial supervision, including improved supervision of financial groups.
- Elimination of barriers to structural adjustment and efficient financial markets.
- Increased transparency and improved customer relations.
During the autumn of 1999 bills were introduced to implement a number of recommendations from the committee, cf. p. 144.
To follow up on the committee's recommendations the government has stated that the Ministry of Economic Affairs will draw up proposals for a new statutory framework in the financial area to be submitted during forthcoming parliamentary sessions.
The intention is for a new statutory framework to consist of a new Act on financial enterprises which includes general supervisory provisions and other areas of legislation which are today to a great extent repeated in the various acts governing the financial area. This will be combined with acts for each sector concerning specific regulation of the various types of activity characterising the individual sectors.
The work is initiated with a series of meetings under the auspices of the Ministry of Economic Affairs attended by representatives of relevant public authorities and trade associations.
Proposal for new capital-adequacy rules
In June 1999 the Basel Committee [7] submitted a proposal for consultation concerning review of the capital-adequacy rules. As a consequence, in the autumn of 1999 the European Commission submitted a consultation paper on a new capital framework for credit institutions and investment companies. In many respects the proposals are similar, although the European Commission's proposal focuses on EU-specific issues. The consultation procedure for both proposals must be completed by the end of March 2000.
During the consultation process the Nationalbank has contributed to creating a framework for a Danish discussion of the new capital-adequacy rules. In November 1999 the Nationalbank held a seminar attended by representatives from the Danish financial sector. At the seminar the Chairman of the Basel Committee, Governor of the Federal Reserve Bank in New York, William McDonough, described the proposed new capital-adequacy rules. In February 2000 the Nationalbank held another seminar at which representatives of the financial sector and the authorities discussed the proposal from a Danish viewpoint.
The background to the proposals for new capital-adequacy rules is that the present rules have fallen behind financial innovation and modern risk-management techniques. In addition, the credit-risk weights are too broadly meshed. Other risks besides credit and market risks, e.g. the interest-rate risk in the banking book and operational risk, are not included explicitly. In general, there is a need for greater coherence between the weighting of credit risk and economic risk, and to increase the differentiation of the credit-risk weights.
The proposed capital regulation consists of three pillars: minimum capital requirements, the supervisory process and market discipline.
The first pillar concerning the minimum capital requirements recommends a revision of the present standardised method to the effect that the credit-risk weights for each loan are calculated on the basis of the borrowers' credit rating by external rating agencies. An alternative method is envisaged whereby the weights are calculated on the basis of the banks' internal ratings of their customers. In the long term this pillar provides for the use of actual risk models. In addition, it is proposed to introduce explicit capital adequacy requirements to cover other risks besides credit and market risks, e.g. the interest-rate risk in the banking book, as well as operational risk.
The second pillar concerning the supervision process contains a number of recommendations of the supervisory authorities concerning supervision of the financial institutions. The proposals include the use of differentiated capital requirements which exceed the minimum capital requirement of 8 per cent in view of the greatly varying risk profiles of the various credit institutions. Furthermore, the supervisory authorities must be able to intervene at an earlier stage and must generally monitor the credit institutions' internal procedures for evaluation of their risk profile and capital base.
The third pillar concerning market discipline describes how the credit institutions can contribute to creating financial stability and market transparency by publishing information on their capital base, etc. Finally, both proposals include recommendations concerning the scope of application of the new capital requirements.
The Banks
In 1999 the banks' financial results showed a sound surplus for the fifth consecutive year. The profit before tax was kr. 14.3 billion, which is a marginal increase of kr. 0.3 billion from 1998. A continuing low level of losses and provisions contributed to ensuring a sound surplus for the banks. The banks' losses and provisions on debtors fell by almost 5 per cent in 1999 and are thus still at a very low level. As yet there are no signs that the Whitsun package has aggravated the banks' losses. Value adjustments of securities rose by 75 per cent, which is the principal reason for the marginal improvement in the profit before tax. Despite the increase in total value adjustments several small and medium-sized banks saw a decrease in value adjustments, which was attributable primarily to the rising level of interest rates in 1999.
Non-interest based income increased in 1999, as net income from fees rose by 13 per cent. Net income from fees accounts for 28 per cent of total net income from interest and fees, which is a minor increase against 1998, when the share was 26 per cent. The tendency for income from fees to increase thus continued in 1999. This is attributable primarily to growth in income from fees related to conversion of mortgage-credit loans and portfolio management, as well as the general focus on potential sources of income from fees. Several banks have stated their intention to increase the interest margin vis-à-vis business customers. This may contribute to increasing interest-based earnings.
Structural changes
In keeping with previous years, a number of structural changes were seen in the banking sector in 1999. The underlying tendency to form conglomerates continues, contributing to increasing the complexity of the structure of financial enterprises. Chart 28 illustrates the strong growth in the market share of financial groups and conglomerates as a ratio of total balance sheet. In 1989 financial groups and conglomerates accounted for almost half of the sector's total balance sheet, while the ratio had increased to 75 per cent in 1998. The conglomerates accounted for only a small proportion 10 years ago, while in 1998 their share was more than 60 per cent of the total balance sheet.
Chart 28 Groups and Conglomerates' Share of Total Balance Sheet
| Note: | A financial group is normally the term used to describe financial enterprises connected by ownership. They consist of the parent company and at least one other financial enterprise. Traditional financial groups typically operate in one submarket, while a conglomerate is a group operating in several financial submarkets (banking, mortgage credit, insurance, etc.) |
| Source: | The Danish Financial Supervisory Authority. |
One example of the formation of conglomerates is the merger between Unibank and Tryg-Baltica in March 1999. Tryg-Baltica Forsikring was restructured as a holding company which then merged with the holding company Unidanmark as the continuing company. In December 1999 this merger was followed by the acquisition by Unidanmark of the Norwegian general insurance company Vesta. The largest Danish banks continued the tendency of recent years for establishment in the other Nordic countries. Den Danske Bank thus acquired the Norwegian Fokus Bank in June 1999.
In June 1999 Codan Forsikring concluded an agreement with Skandinaviska Enskilda Banken (SEB) of Sweden whereby SEB acquired Codan Bank, while Codan Forsikring acquired the general insurance company Trygg-Hansa, owned by SEB. In addition, Codan Forsikring and SEB entered into strategic cooperation on distribution of products.
Another example of structural changes across the national borders of the Nordic countries is the acquisition by the Swedish FöreningsSparbanken of Finance for Danish Industry (FIH) in the autumn of 1999.
The banks' use of information technology is increasing constantly. The banks have thus given higher priority to their Internet strategy and several market participants have established – or plan soon to establish – solutions for e.g. Internet trading of stocks. Most of the customer needs which were previously met by the customer contacting the bank by telephone or in person are now handled via the banks' homebanking systems. The homebanking systems offer functions such as payment of bills, transfers, budget facilities, loan and tax calculations and taxation consequences as well as securities trading, as described above. At the beginning of 2000 more than 540,000 private customers had concluded a homebanking agreement with their bank.
The Mortgage-Credit Institutes
In 1999 the mortgage-credit sector is expected to present a favourable financial result [8], although somewhat below the result for 1998 due to reduced conversion activity, losses on the bond portfolio and increased administration costs. Lending rose by a total of 6.6 per cent in 1999.
Access to the banks' extensive network of branches has proved to be an important parameter of competition for the mortgage-credit institutes. The bank-owned mortgage-credit institutes continue to win market shares from the "old" mortgage-credit institutes [9]. Lending by the "old" institutes increased by a total of kr. 20 billion in 1999, while the increase in total book lending by the other mortgage-credit institutes amounted to kr. 44 billion. These institutes' share of total outstanding loans thus rose to 24 per cent from 20 per cent in 1998.
Mortgage-credit loans at floating interest rates, called adjustable-rate loans or flex loans, continue to draw great interest. This can be attributed primarily to the widening of the differential between short-term and long-term interest rates, but also to the fact that the Whitsun package gradually erodes the value of the tax deductibility of interest payments. The latter contributes to increasing the net interest saving if a house purchase is financed with adjustable-rate loans rather than long-term fixed-rate mortgage-credit loans. Outstanding adjustable-rate loans can be expected to increase further since the financing of housing as from 2000 is based on loans subject to annual interest-rate adjustment. The share of adjustable-rate loans of total lending by the mortgage-credit institutes was almost 6 per cent at end-1999, compared to 3 per cent at the beginning of 1999. The share of adjustable-rate loans subject to annual refinancing constituted slightly more than half of the adjustable-rate loans at end-1999.
The Investment Associations
The total assets of the investment associations have increased strongly in the past 4 years, but particularly in 1999. The relatively low level of interest rates contributes to stimulating interest in alternative placement opportunities. The total assets of the investment associations rose by kr. 79 billion to kr. 204 billion. Nominal sales of new certificates were kr. 49 billion, while capital gains on the investment associations' securities – primarily share investment certificates – amounted to kr. 30 billion.
Interest in share units has risen strongly. In 1999 the assets of the share units exceeded those of the bond units and constituted 56 per cent of total assets, cf. Chart 29.
Chart 29 Assets of the Investment Associations
| Note: | The Investment Associations Council. |
In general, investment associations based on foreign shares achieved the best return in recent years. Investment associations based on Danish shares yielded a return of around 20 per cent in 1999, while associations based on European and global shares rose by respectively 45 per cent and 53 per cent. Investment associations based on Danish bonds typically rose by 0-3 per cent.
VB Finans and Himmerlandsbanken
VB Finans
At the end of 1993 the Nationalbank made available a government-guaranteed overdraft of maximum kr. 4.4 billion to VB Finans, the company responsible for the winding-up of Varde Bank. As described in the 1996 Annual Report, p. 54f, at the beginning of 1996 bankruptcy proceedings were instigated against VB Finans, at the request of its Board of
Directors. VB Finans af 1996, which in connection with the winding-up took over all of VB Finans' assets and certain liabilities, including the Nationalbank's overdraft facility, worked throughout 1999 on winding up the activities of Varde Bank.
During 1999 the company was able to pay approximately kr. 0.1 billion to the Nationalbank as a consequence of the winding-up of exposures, sale of properties and divestment of shareholdings. The company's total debt to the Nationalbank has thus been halved from almost kr. 0.2 billion at the beginning of the year to just below kr. 0.1 billion at year-end.
The ongoing winding-up of the company first and foremost concerns the conclusion of a number of court cases filed against the winding-up estate. The administration of the winding-up estate is expected to take a few more years. It is still not possible to calculate the total costs of the winding-up of Varde Bank.
Himmerlandsbanken
In 1999 no amounts were disbursed under the guarantee provided by the Nationalbank and a number of banks to the winding-up estate of Himmerlandsbanken, cf. the 1993 Annual Report, p. 48. It is still not possible to calculate the total costs of the winding-up of Himmerlandsbanken.
Footnotes
[1] Cf. p. 59.
[2] On purchase of a "blue-stamped" bond a private investor is only subject to tax on the interest income. If the investor purchases a "black-stamped" bond with a coupon rate below the minimum-coupon rate, both interest income and capital gains are subject to tax. A description of the effect of the minimum-coupon-rate rule on the financial market is found in Mads Gosvig and Jeppe Ladekarl, The Minimum Coupon Rate and the 4-Per-Cent Market, cf. Danmarks Nationalbank, Monetary Review. 1st Quarter 1998.
[3] The working group included representatives of the Danish Securities Dealers Association, the Ministry of Finance, the Ministry of Economic Affairs, the Danish Bankers Association, the Danish Financial Supervisory Authority, the Copenhagen Stock Exchange, the Association of Danish Mortgage Banks, the Danish Securities Centre and Danmarks Nationalbank.
[4] See also the Nationalbank's Web site www.nationalbanken.dk under Publications.
[5] In addition to the committee's work 7 subreports were prepared on the following subjects: IT development and the financial sector, regulation of certain means of payment and access codes, development in the financial sector, venture capital, new participants in the financial market, the international position of the financial sector, and administration of long-term savings.
[6] The concept that financial services are purchased without the intermediation of a financial enterprise.
[7] The Basel Committee with a secretariat at the Bank for International Settlements (BIS) in Basel was established in 1975 in order to increase the stability of the international financial system. The committee consists of the following countries: Belgium, Canada, France, Germany, Italy, Japan, the Netherlands, Sweden, the UK, the USA, Switzerland and Luxembourg.
[8] At the time of going to press not all mortgage-credit institutes had presented annual accounts for 1999.
[9] By "old" institutes is meant Nykredit, Realkredit Danmark and BRFKredit, while the others are Totalkredit, Danske Kredit, Unikredit, FIH Realkredit, LRF and from 1998 BG Kredit.
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Version 1.0 April 2000 Nationalbanken.
Published by Danmarks Nationalbank April 2000, http://www.nationalbanken.dk