Glossary

Additional capital. Subordinate loan capital in credit institutions, offered as part of the capital base, that meets certain requirements (no default sanctions for the creditor, an option to defer interest payments and to write down the principal), as well as revaluation reserves.

Adjustable-rate loan. See variable interest rate.

Amortised cost. A principle for valuation of lending by banking institutions. On determination of the value of the loan, the original cost price is calculated less redemptions and any write-downs and with the addition/deduction of the accrued transaction costs, fees and commission to be received during the term of the loan. See also fair value.

Basel II.Description of the Basel Committee's standards for new capital-adequacy rules that entered into force on 1 January 2007.

Basel Committee on Banking Supervision, whose secretariat is at BIS, was set up in 1975 with the purpose of promoting cooperation between national banking supervision authorities and strengthening the stability of the international financial system.

BIS.The Bank for International Settlements serves as banker to the central banks.

Callable bond. A bond which can be prematurely redeemed by the debtor on terms agreed in advance.

Capital adequacy. See solvency ratio.

Capital base.Financial companies' capital required for compliance with the statutory capital requirement. The capital base comprises core capital and additional capital, and the latter may not exceed half of the capital base. The capital base is adjusted for e.g. capital investments in other financial companies.

Capital need. A credit institution must assess its capital need, i.e. capital adequacy in relation to its risks and report this to the Danish Financial Supervisory Authority. See also capital requirement.

Capital requirement. The statutory capital requirement imposed on financial companies. In a credit institution, the capital base must constitute at least 8 per cent of its risk-weighted items. In a pension company, the capital requirement is calculated on the basis of life-insurance provisions with a number of minor additions. The Danish Financial Supervisory Authority may order a credit institution to hold capital in excess of 8 per cent. See also solvency ratio.

Category 1, 2, 3 or 4 banking institution. The Danish Financial Supervisory Authority's categorisation of Danish banking institutions based on their volume of working capital. Banking institutions in group 1 have working capital of kr. 50 billion and above; group 2 from kr. 10 billion to kr. 50 billion; group 3 from kr. 250 million to kr. 10 billion; and group 4 less than kr. 250 million. See the list of categories/groups applied.

Category A, B or C. Danmarks Nationalbank's categorisation of Nordic financial groups and Danish banking institutions. Category A comprises 6 Nordic financial groups including Danske Bank and Nordea. Category B comprises 12 selected major Danish banking institutions, i.e. selected banking institutions in the Danish Financial Supervisory Authority's groups 1 and 2 that are not included in category A. Category C comprises 37 selected small Danish banking institutions and is part of the Danish Financial Supervisory Authority's group 3.

CEBS.The Committee of European Banking Supervisors.CEBS is a level-3 committee for the banking sector, comprising both central banks and supervisory authorities. See the Lamfalussy procedure.

CEIOPS.The Committee of European Insurance and Occupational Pension Supervisors.CEIOPS is a level-3 committee for the insurance sector, comprising supervisory authorities. See the Lamfalussy procedure.

CESR.The Committee of European Securities Regulators.CESR is a level-3 committee for the securities sector, comprising supervisory authorities. See the Lamfalussy procedure.

CIBOR. The Copenhagen Inter-Bank Offered Rate is a reference interest rate for liquidity offered on an uncollateralised basis in the interbank market to banking institutions with a high credit standing.

Clearing. Compilation of each participant's purchases and sales of securities, resulting in the net position of each participant. See also settlement and VP.

CLS. Continuous Linked Settlement is an international currency-settlement system.

Conglomerate (financial). A group comprising both an insurance company and a credit institution or investment company, and in which the financial activities account for a significant share of the balance sheet.

Core capital.In credit institutions, this comprises equity capital adjusted for e.g. undistributed dividend. Furthermore, hybrid core capital may be included.

Cost ratio. A banking institution's costs, excluding losses and write-downs, as a ratio of revenue.

Credit derivative. A term used for a number of financial derivatives that can be used for trading in credit risk.

Credit risk. The risk of suffering a loss should the counterparty default on its payment obligations.

Credit-risk measure. Calculation of banking institution i's credit risk on the lending portfolio is based on the following formula:

P_i^corporate is the weighted estimated failure rate for the companies using banking institution i. The estimated failure rate of the individual company using the individual banking institution is weighted by the company's debt as a ratio of the total debt of all companies using the banking institution in question. As an approximation of the estimated failure rate for households (P^households) and agriculture (P^agriculture) the current year's average loss ratio for each of the two groups is applied. U_i is the proportion of banking institution i's lending granted to, respectively, the corporate sector, the households and agriculture.

Credit spread.The difference between the yield on two otherwise similar bonds where the issuers have different credit standings.

Credit standing. Assessment of a debtor's willingness and ability to honour its commitments. See also rating.

Deposit margin. The difference between the banking institutions' rate of interest on deposits and a reference interest rate, e.g. CIBOR.

Depositor Guarantee Fund. The Guarantee Fund for Depositors and Investors is a private, independent institution established by act of parliament. It grants compensation to depositors and investors in Danish banking institutions, mortgage-credit institutes and investment companies for losses in connection with suspension of payments or compulsory liquidation. Under certain conditions, branches of foreign credit institutions and investment companies may also be included in the Danish depositor guarantee scheme.

Derivative. See Financial derivative.

Distance to insolvency. The risk measure distance to insolvency shows the fluctuations in asset market value that can be accommodated within a banking institution's buffers of capital, write-downs and earnings. Distance to insolvency shows the probability that a banking institution keeps within the statutory solvency requirement, i.e. that a decrease in the assets' estimated market value does not cause the banking institution to fall below the statutory solvency requirement.The distance is measured by the number of standard deviations for the estimated market value of the assets. See also Value-at-Risk.

Equity capital. The owners' share of the company's capital, including share capital, accumulated profits, etc. Calculated as the value of the assets less debt and other liabilities.

ESCB. The European System of Central Banks consists of the European Central Bank (ECB) and the central banks of all EU member states.

Estimated failure rate is in this publication for companies estimated in a failure-rate model based on key accounting ratios, etc. The estimated failure rate indicates the probability that a company involuntarily suspends its activity within the next few years.

European passport. The option to operate across borders within the EU on the basis of approval in one member state.

Excess capital adequacy.The part of a credit institution's capital base that exceeds the statutory solvency requirement.

Exchange-rate risk. The risk of losses due to exchange-rate fluctuations.See also market risk.

Fair value.An estimate of the proceeds from transfer of an asset to a buyer on market terms. The fair value of a liability is an expression of the set-off value of the liability on market terms. See also amortised cost.

Financial derivative. An instrument whose value is derived from the price of an underlying asset such as a security, a product or a currency. Options and swaps are examples of financial derivatives.

Financial Sector Assessment Program (IMF-FSAP) is a joint initiative by the International Monetary Fund (IMF) and the World Bank. The initiative aims to conduct an in-depth assessment of a country's financial sector and appurtenant risks. Participation in IMF-FSAP is voluntary.

Forward rate. An implied short-term interest rate at a future point in time. It is derived on the basis of bonds with different, long maturities. The forward rate reflects expectations of the future rate of interest, including, inter alia, a risk premium to take account of the uncertainty of the future interest rate.

Gearing. An expression of a company's debt ratio. Can be calculated as debt (loan capital) as a ratio of equity or assets as a ratio of equity.

Guaranteed interest rate, also called technical interest rate. The lowest return on the savings guaranteed to the policyholders in a pension company. The guaranteed interest rate is used to calculate the relationship between paid-in premiums and the guaranteed benefits to policyholders in a pension company under the insurance contract. The interest rate is based on a number of assumptions regarding risk of disability, mortality, and interest rates and costs.

Hedge association. The Danish equivalent of a hedge fund. Unlike e.g. investment associations, hedge associations are not subject to limitations to their gearing and short-selling options.

Hybrid core capital. Capital that may, under certain conditions, be included in the banking institutions' core capital. Hybrid core capital is additional capital subject to stricter requirements, including that the maturity must not be fixed, and that interest on debt lapses if the banking institution has no free reserves. Hybrid core capital must not exceed 15 per cent of the core capital.

IAS.International Accounting Standards. See IFRS.

IFRS. International Financial Reporting Standards. The international accounting standards prepared by the independent International Accounting Standards Board (IASB) to make accounts comparable across countries.

Implied volatility. The theoretically derived volatility in the Black and Scholes option-price model for an underlying financial asset, calculated on the basis of the observed option prices.

Insolvency. A company's situation if the value of its equity is negative.

Insurance provisions. The total provisions made by a pension company for settlement of commitments relating to the insurance policies issued by the company. Insurance provisions are divided into various categories, of which the most important in pension companies is life-insurance provisions.

Interbank market. In Denmark, the market for krone-denominated loan agreements and interest-rate derivatives with a maturity of up to a year transacted among banking institutions and mortgage-credit institutes. Often referred to as the money market.

Interest margin. The difference between the rate of interest for lending and deposits.

Interest-rate guarantee. See guaranteed interest rate.

Interest-rate risk. The risk that interest-rate fluctuations generate losses. The Danish Financial Supervisory Authority's key ratio " interest-rate risk" is an expression of the part of the core capital after deductions that is lost on a parallel shift of the yield curve by 1 percentage point.See also market risk.

Internal interest rate. See yield to maturity.

IOSCO. The International Organization of Securities Commissions, established in 1983, is an international forum for securities supervisors.

Issue.The issue of e.g. securities.

Kronos is Danmarks Nationalbank's real-time gross settlement (RTGS) system for Danish kroner and euro and is thus a core element of Danish payment systems. The system is used primarily for time-critical large-value payments between account holders at Danmarks Nationalbank, as customer or interbank payments.

Lamfalussy procedure. A procedure determining the framework conditions for a new, faster legislative process within the EU, respecting the competences of the various EU institutions. The Lamfalussy procedure consists of four levels: at level 1, the European Parliament and the Council jointly adopt the framework regulation. More technical provisions are laid down in legislative acts issued by the European Commission following consultation of a special committee of member state representatives, i.e. level 2. Level 3 comprises close cooperation between the member states' supervisory authorities, etc., while level 4 is enforcement of the provisions by the European Commission.

Lending margin. The difference between the banking institution's lending rate and a reference interest rate, e.g. CIBOR.

Liquidity. A measure of negotiability. See also liquidity premium.

Liquidity premium. The premium which the buyer is willing to pay for a more liquid asset.

Liquidity reserve.Excess liquidity in relation to the statutory minimum requirement.

Liquidity risk. The risk of incurring a loss because the current liquidity is not sufficient to cover the current payment obligations.

Market risk. The risk that fluctuations in market prices (interest or exchange rates or equity prices) will result in losses. See also Value-at-Risk.

OMXC20. Equity index consisting of the 20 most traded and liquid Danish shares listed on the Copenhagen Stock Exchange. The composition of the index is revised twice a year.

Operational risk. The risk of losses due to IT system failure, human errors, fraud, etc.

Option. A financial derivative granting the owner (buyer) the right, but not the obligation, to buy or sell an underlying asset (e.g. a product, a security, a currency or another derivative) at an agreed price (the strike price) at/before an agreed future point in time. The seller of an option is obliged to fulfil the owner's right. An option can also be an inherent element of securities in the form of the right of premature redemption.

Percentile. The numerical value representing the share of the observations below that value. For example, the 10th percentile for the estimated failure rate illustrates that the estimated failure rate for 10 per cent of the companies (observations) is below this value.

Portfolio. A holding of assets.

Profit ratio.Calculated as operating profit over operating income.

Profitability. See return on equity.

Prime broker. An investment bank that services hedge funds in connection with their activities in the financial markets. Prime brokers offer the following services, among others: trading transactions, clearing and settlement, securities lending, help to set up hedge funds. See hedge associations.

Provisions for loans.See write-downs.

Rating. An assessment of credit standing given by rating agencies such as Fitch, Moody's and Standard & Poor's. Rating is used e.g. in connection with the issue of securities and takes the probability of default and the size of the loss into account.

Real-time gross settlement (RTGS) system. Payment system characterised by individual settlement of payments in real time. RTGS systems are typically used for settlement of large-value, time-critical payments. Danmarks Nationalbank's payment system, Kronos, is an RTGS system.

Red light.See traffic lights for pension companies.

Return on assets. A measure of a company's ability to achieve a return on invested capital. It is calculated as the company's profit before interest (primary operating result) as a ratio of its assets.

Return on equity. A measure of a company's ability to achieve a return on the owners' investment. Calculated as the company's profit as a ratio of its equity capital.

Risk-weighted items. The risk-weighted assets and off-balance-sheet items, i.e. items subject to credit risk and market risk. Under Basel II, the banking institutions will also have to take the operational risk into account. See also solvency requirement.

S& P 500. US abbreviation of Standard & Poor's 500 stock Index. It consists of the 500 most traded US equities and is e.g. used as an underlying index for equity futures and equity options.

Settlement.Completion of trade by final settlement of agreed commitments. See also clearing and VP.

Short-selling. Sale of securities or currency not yet possessed.

Solvency. Indicator for a company's ability to sustain losses. More specifically the part of its assets that can be lost before the losses affect its loan capital. Calculated as the ratio of equity capital to assets.

Solvency ratio. A key indicator for credit institutions, defined as capital base as a ratio of risk-weighted items. See also capital requirement.

Solvency requirement.Seecapital requirement.

Standard deviation. The average distance from the observations to the average in the data material.

Subordinate loan capital. Debt that is subordinate to other liabilities in the event of the borrower's compulsory liquidation. Subordinate loan capital meeting certain requirements can be included in the credit institutions' additional capital. See also capital base.

Swap. A financial derivative that is an agreement between two parties to exchange payments over a fixed period. Currency swaps are used to restructure payment flows between various currencies. Interest-rate swaps are typically used to restructure payment flows between fixed and variable interest rates. The overall value of a swap is usually zero when the agreement is made, but may subsequently become positive or negative, depending on market developments in interest and exchange rates.

Swaption. An option on a swap. The buyer of a swaption has the right, but not the obligation, to conclude a swap on agreed conditions.

Systemic (financial) risk. The risk that an event may trigger financial losses and/or lack of confidence in a significant part of the financial system and thus potentially jeopardise financial stability. Events leading to systemic risk may occur suddenly and unexpectedly, or the risk builds over time, e.g. in case of insufficient regulation.

Technical interest rate. See guaranteed interest rate.

Term structure of interest rates. The relationship between securities' yields and maturities. A rising term structure, i.e. where yields on short-term securities are lower than yields on long-term securities, is considered normal. A falling term structure is described as inverse.

Traffic lights for pension companies.The Danish Financial Supervisory Authority's risk scenarios for pension companies aimed to illustrate whether the company's chosen relationship between investment risk, capital base and commitments is appropriate. Each risk scenario is used to test the pension companies' ability to sustain losses due to changes in interest rates, falling equity and real estate prices, etc. Red light illustrates the consequences of a medium-severe negative market development, including a change in interest rates by 0.7 percentage point in the most detrimental direction and a fall in equity prices by 12 per cent. Yellow light illustrates a very severe market development, including a change in interest rates by 1 percentage point in the most detrimental direction and a fall in interest rates by 30 per cent.

Value-at-Risk (VaR). A model for measuring market risk based on volatility and correlations in historical market developments. For a given portfolio and within a fixed time horizon, the model calculates the maximum loss that may arise with a given probability (often 95 per cent).

VaR. See Value-at-Risk.

Variable interest rate. An interest rate that varies during the maturity of the loan, e.g. because it is agreed that it tracks another interest rate.

Volatility. A parameter indicating the size of the fluctuations in an asset's price, e.g. the fluctuations in a share price. See also implied volatility.

VP. VP Securities Services A/S. VP's most important tasks are electronic issue of securities, registration of ownership and rights concerning electronic securities, and clearing and settlement of securities transactions.

Working capital. Comprises deposits, issued bonds, subordinate loan capital and equity capital. See also category 1, 2, 3 or 4 banking institution.

Write-down on loans. For loans on which a loss is expected (i.e. there is an objective evidence of impairment), the banking institutions must write down the loan to the present value of the expected future payments, including realisation of collateral.

Yellow light. See traffic lights for pension companies.

Yield curve. See term structure of interest rates.

Yield to maturity or internal interest rate. The fixed discount rate at which the present value of a cash flow equals the investment.