Today Danmarks Nationalbank has published its current assessment of financial stability in Denmark.
The earnings of Danish banks have generally improved, but many banks still have low return on equity and high costs. Earnings are under pressure from low demand for new loans and declining interest margins, primarily due to increased competition. "This indicates a need for further capacity adjustment within the sector," says Governor Lars Rohde, Danmarks Nationalbank.
At the same time, the continued low level of interest rates makes it difficult for banks to achieve a reasonable return on their excess liquidity. This may give them an incentive to invest in riskier assets or ease credit standards. "We are very much aware of this development," says Lars Rohde, adding: "The banks' high lending growth prior to the financial crisis was achieved at the expense of credit quality, and it is important to ensure that this is not repeated."
Danmarks Nationalbank has examined the robustness of the banks' capitalisation by means of a stress test. The results show that the five systemic banks are resilient to severe macroeconomic shocks, and that their Common Equity Tier 1 capital remains above 8 per cent. Common Equity Tier 1 capital of 8 per cent is the toughest requirement in the stress test of the largest European credit institutions currently being carried out by the European Banking Authority, EBA.
A more stable development in the financial markets and the sector meant that in December last year Danmarks Nationalbank announced the phasing-out of the liquidity-supporting measures established during the financial crisis as from 1 July 2014. Hence, sector company shares and credit claims will no longer be included in the collateral basis, and 6-month loans will be terminated. The banks have had a reasonable amount of time to adjust to these changes, and in Danmarks Nationalbank's assessment, the phasing-out process has been smooth.
The overall structure of the banking union is now in place, but some sub-elements still remain to be developed. "Whether Denmark should participate is a political decision, but overall Danmarks Nationalbank is of the opinion that Denmark's interests are best served by participating in the banking union," says Lars Rohde.
Enquiries can be directed to Karsten Biltoft on tel. +45 3363 6021.