Optimism in the banking sector provides breeding ground for increased risk-taking
Danmarks Nationalbank's semiannual analysis of financial stability shows that the largest banking groups achieved their best ever overall performance in 2016 and the banks' financial statements for the 1st quarter of 2017 also recorded sound profits. The banks' earnings are underpinned by temporary effects from very low loan impairment charges. The economic upswing, rising house prices and the continued low level of interest rates may lead to a general perception of low credit risk. This may intensify the pressure on the banks' credit standards. The large banks comply with the current capital requirements, but their capital base is lower than that of other Nordic banks. Results from Danmarks Nationalbank's accounts-based stress test show that, in a severe recession scenario, few of the systemic banks will have a small capital shortfall relative to the buffer requirements.