Analyses focus on current issues of particular relevance to Danmarks Nationalbank’s objectives. The analyses may also contain Danmarks Nationalbank’s recommendations. They include our projections for the Danish economy and our assessment of financial stability. Analyses are targeted at people with a broad interest in economic and financial matters.
Financial stability, 1st half 2014
Danmarks Nationalbank finds that the Danish banks overall are well-capitalised, are resilient to severe macroeconomic shocks and have excess liquidity. Most banks have come through the crisis, but many banks still have a low return on equity and high costs. Earnings are under pressure from lower demand for new lending, resulting in increasing competition and declining lending margins. Given the generally low level of interest rates, this makes it difficult for the banks to achieve a reasonable return on excess liquidity. This may give banks an incentive to invest in riskier assets or ease credit standards in order to increase their lending volume. Looking ahead, earnings are expected to remain under pressure from low demand for new loans and low margins. In order to protect financial stability in future, capacity adjustment in the sector is necessary, e.g. via mergers, with the aim of generating more profitable businesses. 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.