Recession probabilities in the USA and the euro area have risen to high levels in recent years. A global downturn will affect a small open economy like Denmark. The risk of recession in Denmark has risen in line with the risk abroad, but the Danish economy is poised well-positioned to withstand a potential global economic downturn.

Over the past decade, business investment appetite has been in line with that experienced during previous crises and upswings. Investment has increased as spare production capacity has been absorbed. During the crisis and post-crisis years, investment was mainly constrained by high economic uncertainty and low foreign demand for Danish products. Since the mid-1990s, the growing weight of the service sectors in the Danish economy has structurally reduced investment.

The target for issuance of domestic government bonds in 2019 is increased to kr. 75 billion due to an increase in the central government's purchases of government-guaranteed mortgage bonds. The expected average sales of government bonds per auction are around kr. 3 billion at market value. The on-the-run issues will remain unchanged and focus will be on issuance in the 2-year and 10-year nominal bonds.

The natural real interest rate has declined since the 1990s. An important explanation is demographic trends in Denmark and abroad, which can be expected to continue in the coming years. Among other factors, lower natural interest rates have prompted central banks in several countries to apply unconventional monetary policies in order to stimulate the economy and increase inflation. Spillover effects from similar measures could affect the Danish economy in the future.

We study how the introduction of interest-only mortgages in 2003 affected job creation and the skill composition of the workforce over the business cycle. The reform significantly increased household expenditure and firms reacted to this demand shock by creating jobs. These positions, however, are classified as low-skilled occupations, filled by younger and less educated workers who face earlier separations and a higher degree of unemployment ex-post.

The analysis looks at the complex network created when the financial institutions exchange many thousands of transactions across the Danish interbank market. The analysis shows that there is a core consisting of a few institutions which are important in terms of spreading liquidity, and that a small number of institutions alone connect isolated institutions with the rest of the network. The interconnectedness of the network emphasise the importance of having robust central participants.

The report presents the conclusions from Danmarks Nationalbank's oversight of the Danish payments infrastructure in 2018. Two major system changes were introduced with the implementation of Kronos2 and the migration of kroner to the trans-European securities platform, T2S. The core payment and settlement systems and most important payment solutions extensively comply with international standards for efficiency and security. Cyber risk management was still a focus area of Danmarks Nationalbank's oversight. The maturity of the systems' cyber security efforts varies.

The systemic credit institutions' results remain high, underpinned by low loan impairment charges since 2010. A substantial dampening of economic growth would lead to higher loan impairment charges and consequently lower earnings in future. The requirements for banks' capital structure are likely to be tightened considerably in the coming years. This may put pressure on the systemic credit institutions' excess capital adequacy if they fail to build up further capital adequacy beforehand.

Danmarks Nationalbanks conducts a semi-annual stress test of the Danish banking sector. The stress test shows that the systemic banks satisfy their risk-based capital requirements and the leverage ratio requirement in a severe recession scenario. The analysis also looks at the banks' ability to satisfy MREL under stress and shows that the systemic banks depend on being able to continue to issue MREL-eligible instruments in order to satisfy the requirement.

Economic growth continues in Denmark and many other parts of the world, but the pace is set to slowdown in the coming years. A substantial dampening of economic growth would lead to higher loan impairment charges and consequently lower earnings in the banks in the future, Danmarks Nationalbank points out in its semi-annual analysis of financial stability in Denmark.

In this paper an agent-based model is used to investigate how tightening loan-to-value and loan-to-income ratios affects house price cycles. The use of an agent-based model allows for the analysis of the effects of these policies on heterogeneous households. I find that these policies reduce house price cycles in a non-linear way that depends crucially on the distribution of households and highlights the importance of macroprudential policymakers taking into account the distributions of households.

I build a DSGE model where households face a loan-to-value (LTV) constraint and a debt-service-to-income (DTI) constraint. From an estimation of the model, I infer when each constraint was binding over the 1975-2017 timespan in the U.S. I also infer that DTI standards were relaxed during the mid-2000s credit boom. In the light of this, the boom could have been avoided by tighter DTI limits, but not by tighter LTV limits. The role of multiple credit constraints for the emergence of nonlinear dynamics is corroborated by county panel data.

Kronos is Danmarks Nationalbank's payment system for large-value time-critical payments and it is the heart of the Danish financial infrastructure. The analysis assesses the robustness of the system, measured as the change in participants' liquidity needs as well as their ability to settle payments in a timely manner when the system is exposed to stress in three different scenarios: (1) One large participant cannot submit payments for a full business day, (2) the money market is inaccessible, and (3) the participants' access to intraday credit is reduced. The analysis shows that the system is resilient in all three scenarios.

This analysis shows how fluctuations in equity prices affect business in-vestments in fixed capital via a "Tobin's Q channel". The main conclusion is that an increase of 10 per cent in the prices of Danish listed firms leads to an increase of 1.8 per cent in those firms' investments.

It is important to society that payments and securities transactions can be affected in a safe and efficient manner. Danmarks Nationalbank contributes to this process by overseeing important parts of the financial infrastructure. Danmarks Nationalbank's policy for oversight is set out in this document.

The upswing in the Danish economy continues for the sixth consecutive year, and so far it has been balanced. The boom is also set to continue in the coming years, but at a slightly slower pace. This is only natural after several very good years.

The Danish economy is in a balanced upswing for the sixth year in a row. Economic growth is deemed to continue at a more steady pace. The economy is well prepared for addressing the current risks, including some dampening of growth abroad. It is important for the structural reforms implemented and the objective of structural balance of public finances in 2021 to be maintained. The expected dampening of growth does not call for expansionary fiscal measures.

The housing taxation agreement from 2017 contributes to higher prices for single-family houses and lower prices for owner-occupied flats towards 2022.

The krone exchange rate is very close to the central rate. Danmarks Nationalbank bought kroner in December 2018 and January 2019 after a gradual weakening of the krone during 2018. Monetary policy and the broader financial conditions are accommodative and support the current economic expansion. Borrowing rates for the real economy have been falling for a number of years, but credit growth remains moderate, and overall corporations and households have strengthened their financial balances through the economic expansion.

Danmarks Nationalbank's accounts for 2018 show a loss of kr. 24 million, compared with a loss of kr. 254 million in 2017. Danmarks Nationalbank’s revenue is subject to structural pressure from negative interest rates. The loss not being greater is i.a. due to the temporary exchange rate gain of kr. 1.4 billion as a consequence of the strengthening of the euro against.

This analysis presents the marginal social costs for domestic consumer-to-business, C2B, payments. The analysis covers cash payments and payment cards.

Within a cointegrated VAR framework I show that the traditional money-demand relation can no longer explain the recent development of monetary aggregates in Denmark. Instead, I argue that the introduction of housing wealth and the role of precautionary demand for liquidity improves both the explanatory power of money demand and the stability of the long-run estimates. Finally, I show that the negative interest rate environment has not affected the underlying determination of money demand.

This analysis presents for the first time the social costs of domestic per-son-to-person transfers in Denmark. The analysis includes the most com-mon methods of person-to-person transfers: mobile payments, cash payments and credit transfers.

This analysis presents the social costs of domestic business-to-business payments in Denmark. The analysis includes the most common methods of payments between firms which are credit transfers, card payments, and direct debits.

For person-to-person, P2P, payments, mobile payment is the method that entails the lowest social costs. One of the reasons is that payment by mobile phone has become very popular for settling P2P accounts.

The analysis assesses the build-up of riskiness of corporate credit allocation using an indicator based on firms' financial statements. The indicator shows an increase in the riskiness of credit allocation in the most recent upswings. Overall, riskiness was lower in 2017 than in the pre-crisis period, however. Similar development is seen across industries. Unlike in the pre-crisis period, no particular industry stands out.

Many Danish homeowners convert rising house prices into spending by increasing their mortgage debt. They do this by refinancing existing mortgages or raising additional loans, thereby translating home equity into liquid funds. Rising prices of owner-occupied homes thus provide scope for increased consumer spending or e.g. repayment of other debt.

We study the effect of house price developments on home-equity extraction and household expenditure, exploiting data covering the population of Danish homeowners between 2009 and 2016. Our findings indicate that house price increases affect home-equity extraction – and more so for homeowners close to their borrowing limits. Furthermore, the effect of house prices on expenditure is entirely driven by home-equity extraction. Our results indicate that the mortgage system plays an important role for the transmission of housing wealth increases to the real economy.

Denmark's government debt policy has been characterised by four years of very low funding costs and declining debt. In 2018, the central government debt fell to 19 per cent of GDP. The central government saves considerable interest costs by granting on-lending and buying bonds to finance social housing. At the same time, it contributes to supporting the market for government securities. Market liquidity is also supported by the central government's activity in the secondary market and by a well-functioning primary dealer model.

We analyse macro-financial linkages in the Danish economy by estimating a structural VAR model. We construct a new financial condition index for the Danish economy. We find that financial conditions stimulated GDP before the financial crisis and deepened the subsequent recession. In recent years, financial conditions have contributed to the expansion in Denmark.

We investigate the co-movement of house prices, home equity extraction and consumption in Denmark. Using survey data we develop a measure for unanticipated house price changes which can be merged on Danish administrative data. Thus, we can show how home owners who experience an unexpected positive house price shock extract home equity and increase spending. We find that the effect is driven by home owners who could potentially benefit from refinancing existing mortgages. This indicates that the wealth effect is intimately connected to the functioning of the mortgage market.

Normally the numerical financial data of a firm is scrutinised when the soundness of the firm is assessed. But texts in the annual reports may also contain important information that can help to predict distress events.

Machine learning methods make data modelling more flexible and enable the use of unstructured data, which conventional statistical methods do not permit to the same extent. If such methods are used to include auditors' reports and managements' statements from firms' annual reports when calculating their probability of distress, the accuracy of the calculation is increased considerably. Especially the auditors' reports contribute useful information.

The analysis examines the extent to which the krone exchange rate affects the current account. The krone rate turns out to have only a modest impact on the current account and it comes with a lag. Although globalisation has increased trade with the rest of the world and has resulted in production chains being split across countries, the impact of the krone rate to the current account has been stable over time. In the long term, the current account is driven by factors other than the krone rate.

The enlargements of the EU led to large labour migration flows from Eastern to Western Europe which expanded the labour force considerably in several of the countries currently experiencing labour shortages. The analysis indicates that when the unemployment gap narrows by 1 percentage point, inflows of EU labour increase the labour force in an EU country by 0.1 per cent p.a. This has a certain countercyclical impact. Large income differences exist between Eastern and Western Europe. As a result, Western European firms are still able to attract EU labour during boom periods.

We use micro level registry data to study firm dynamics in Denmark. Similar to findings for the US, young firms are more likely to exit and to grow faster over time but Danish firms also take longer to reach maturity. We do not observe any signs of a slowdown in the entry rate or long-run scarring effects on firms entering in recessions. However, fluctuations in the entry rate have persistent effects on the long-run aggregate volume of value added.

Danmarks Nationalbank and the financial sector have joined forces to establish TIBER-DK, a programme for testing the most important Danish banks and essential parts of the financial infrastructure. The aim is to increase cyber resilience and promote financial stability.

The target for sales of domestic government bonds and T-bills in 2019 is kr. 65 billion and kr. 30 billion, respectively. This is unchanged from 2018. Issuance will be focused in the 2- and 10-year maturity segments. On 23 January, a new 10-year bond with maturity in 2029 will be opened. A new 2-year bond with maturity in 2022 will also be opened in the 1st half of the year.

In 2018, the central government has purchased all government-guaranteed mortgage bonds issued for financing social housing. The government will also bid for such bonds in 2019. The purchases allow the central government to build up series of liquid government securities and maintain a broad range of on-the-run issues. The government’s interest rate risk is independent of the coupon and maturity of the bonds purchased.

We explore the consistency at household-level between register-imputed and survey-based consumption figures for Denmark over the period 2002-15. We find that the marginal propensities to consume out of income estimated on the basis of register data are not significantly different to those estimated on the basis of survey data.

Despite the introduction of a minimum requirement of 8 per cent of total liabilities and own funds, the requirements for some SIFIs remain too low to enable recapitalisation and continuation in a crisis situation. A risk-sensitive MREL for mortgage credit institutions is necessary in order to ensure that there are sufficient funds to resolve them in a crisis situation. The cost of introducing an MREL for mortgage credit institutions is low. Converted into an increase in administration margins, it corresponds to an increase of less than 1 basis point on average.

The medium-sized banks have expanded their activities in Aarhus and Copenhagen by opening branches and increasing their lending for housing purposes substantially. While the number of bank branches in Denmark has generally been falling for several years, the medium-sized banks have opened an additional 19 branches since 2012, most of them in growth areas such as Aarhus and Copenhagen.

Overall, lending growth is limited, but the medium-sized banks have opened new branches and substantially increased lending for housing purposes in growth areas. It is important for the banks to allow for potential risks associated with entering into new market areas and to refrain from using credit standards as a competition parameter. Money laundering problems have spelled out the need for increased focus on measures to combat illegal activities. Efficient anti-money laundering measures call for stronger cross-border cooperation.

Danmarks Nationalbank's semi-annual stress test of the Danish banking sector shows that the largest banks satisfy all capital requirements in a severe recession scenario. The analysis also describes Danmarks Nationalbank's approach to making the adverse scenario countercyclical.

Economic growth in Greenland is high these years, and this is set to continue. The main reasons are high fish prices and larger catches. Fisheries are mainly sustainable. Unemployment is low and the risk of overheating high. Consequently, there is a need for tight fiscal policy, and large-scale investments in airports should preferably be implemented gradually. Long-term economic development requires a broader business sector, a labour force with higher qualifications and increased productivity.

Neither the banking union nor the Economic and Monetary Union, EMU, is centred round joint liability. That is why concerns about ”footing the bill” for bank rescues in other member states should not be the key issue in an assessment of the pros and cons of Danish participation.

Since the financial crisis, there has been increased focus on making the financial sector more resilient. One of the tools for achieving this objective is the Danish Financial Supervisory Authority's guidelines from 2016 on prudent credit assessment when granting housing loans in growth areas. These guidelines have made borrowers in growth areas borrow less than borrowers outside the growth areas, but the impact is modest. The modest impact may be due to slow implementation, scope for deviation from the guidelines and the fact that the guidelines were in line with best practice in the institutions.

The Faroese economy is booming, and labour market pressures are high. Fiscal policy should dampen demand in order to mitigate the risk of the economy overheating. Furthermore, the framework of local government finances should be tightened to ensure that the conditions are in place for fiscal policy to have a stabilising effect on the economy in future. The booming economy means that now is a good time to make public finances ready to tackle the higher expenditure associated with the ageing population in the coming decades.

We develop a probability-of-default model for Danish corporate firms based on deep learning that employs the managements' statements and auditors' reports of the annual reports in addition to the numerical financial variables. Our results show that the text segments provide a statistically significant enhancement of the prediction accuracy compared to models that do not employ the text segments, in particular for large firms. Our results furthermore show that the auditors' reports contain more relevant information than the managements' statements.

The financial crisis ten years ago brought large costs to society and – as a consequence – an increase in policymakers’ focus on risks to the financial system as a whole and how to prevent and mitigate them, i.e. macroprudential policy. This paper gives an overview of key features of the Danish financial system and points to current macroprudential policy challenges. The paper sets the stage for a conference on macroprudential policy on 19 November 2018 that Danmarks Nationalbank hosts together with the European Department of the International Monetary Fund (IMF), and the Center for Financial Frictions (FRIC) at Copenhagen Business School (CBS).

This paper aims to test the microfoundations of consumption models and quantify the macro implications of heterogeneity in consumption behavior. We propose a new empirical method to estimate the sensitivity of consumption to permanent and transitory income shocks and apply it to administrative data from Denmark. We find that households who stand to lose from an interest rate hike are more sensitive to income shocks than those who stand to gain. This interest rate exposure channel is potentially more important than the standard intertemporal substitution channel.

We implement a regularly top-performing machine learning model and find that the added complexity in the model does not imply that the model is better at capturing correlation in corporate distresses compared to traditional distress models. Instead, we propose a frailty model, which allows for correlations in distresses. This model demonstrates competitive performance in terms of ranking firms by their riskiness, while providing accurate risk measures of a corporate loan portfolio.

The Danish Payments Council has surveyed the social costs of payments in Denmark. The social costs of payments between households and businesses have almost halved in seven years. No methods of payment have become more expensive, neither in physical nor in non-physical trade , and Danish households have access to several methods of payment with low social costs. The aggregate social costs for all types of payment were kr. 15.6 billion in 2016.

The paper describes the central concepts in the analyses as well as how the Danish Payments Council has collected data for the survey.

This analysis presents the socials costs of domestic consumer-to-business payments in Denmark. In the analysis, cash, payment cards, and the most common payment methods for paying bills are examined.

The analysis presents the aggregate costs of payments in Denmark. I.e., consumer-to-business payments, business-to-business payments, and person-to-person transfers. In addition, the analysis gives insight into the development in the payments market during the last decade.

The Danish economy is now experiencing one of the longest periods of continuous growth. The upswing has been healthier and more balanced than it was in the mid-2000s, where the economy overheated. Although labour market pressures currently exist, they are not as strong as then. The economy may continue to expand without any imbalances, but experience also shows that it can overheat suddenly and violently.

The boom in the Danish economy continues, with robust growth and rising employment. Average growth in real GDP in 2017-18 is forecast at 1.8 per cent, with similar levels the next two years. Labour market pressures are mounting, and wage growth has accelerated a little. There is room for this in the economy. In good times it is important to prepare for the period after a cyclical reversal. Fiscal policy should contribute to a continually balanced upswing and should not stimulate demand further. Dampening of growth towards the end of the boom does not call for special economic policy measures.

The krone has been stable, and it is the longest period without interventions in the currency market since adopting the fixed exchange rate regime in 1982. The ECB continues to normalise its monetary policy and expects to end net purchases of bonds after December 2018. In recent years, Danish households have shifted to loans with lower interest rate risk and loans with amortisation. This makes their disposable income less sensitive to interest rate changes. ((From 2019 is published as an analysis)

Housing and equity prices have increased significantly in recent years, while interest rates are exceptionally low. Based on a structural vector autoregressive model, these factors, combined with credit growth, are overall estimated to have contributed 0.3-0.5 percentage points per year to year-on-year GDP growth since 2016. In recent years, the contribution has been at its highest level since prior to the financial crisis in 2008. Financial conditions are expected to continue to stimulate economic growth during the 2018-20 forecast period.

The Danish labour market is faced with mounting capacity pressures, but is still not showing signs of overheating. The impression, based on a broad range of indicators, is one of balanced labour market developments so far during the upswing. Viewed in isolation, a change in the demographics of the working age population has reduced the labour supply since 2008. This emphasises the need for foreign labour to support the labour demand of the upswing.

Most of the core financial sector participants report that their levels of cyber resilience have been raised compared to 2016. A few core participants have not improved their level. That is one of the findings of a questionnaire survey conducted by Danmarks Nationalbank.

Danmarks Nationalbank's calculations show that the mortgage banks' total funding need in periods of diving house prices will be smaller with an MREL than without an MREL. This is because an MREL will increase the mortgage banks' funding need in normal times, thereby ensuring that they are better prepared for periods of falling house prices and an increasing top-up collateral requirement. This will make the funding needs of the mortgage banks less sensitive to house price fluctuations.