The large Danish banks are well-capitalised
The capitalisation of the five systemically important banks is high. "Capital requirements will increase in the coming years due to the phasing-in of new EU requirements, and it is important for the banks to maintain high excess capital adequacy relative to the fully phased-in requirements," says Governor Lars Rohde, Danmarks Nationalbank.
The large Danish banks are resilient to considerable stress
Danmarks Nationalbank has examined the robustness of the banks' capitalisation by means of a stress test. "The stress test shows that the five largest banks are resilient to severe macroeconomic shocks," Lars Rohde adds. A stress test at the EU level prior to the establishment of the banking union showed a similar result.
Earnings are being squeezed by limited demand and increased price competition
The banks' earnings are squeezed by limited demand for new loans and increased price competition. At the same time, the continued low level of interest rates puts the deposit business under pressure as the banks pay a relatively high rate of interest on deposits relative to the current money market rate. "For banks with low earnings, it is relevant to look into the opportunities for capacity adjustment, including mergers," says Lars Rohde.
Banks are easing their credit standards for corporate customers
Danmarks Nationalbank's most recent lending surveys point to a slight easing of credit standards for loans, particularly to the corporate sector. The banks state increased competition as the most important underlying factor. "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," Lars Rohde emphasises.
Low interest rates may lead to excessive risk-taking
Interest rates in Denmark are currently very low, volatility is low and the prices of financial assets have risen considerably. By taking excessive risk, financial market participants may become vulnerable to an abrupt reversal of the global search for yield. Hence, the current market conditions could entail financial stability risks.
"There are currently no indications that major systemic risks have built up in the Danish financial system as a result of the low level of interest rates. But there is reason to be on guard," says Lars Rohde.
"Credit institutions should ensure that they are able to withstand both direct losses due to price adjustments for financial assets and the derived effects of the potential market turmoil triggered by such market adjustment – e.g. because market access becomes more difficult," says Lars Rohde.
Enquiries can be directed to Karsten Biltoft on tel. +45 3363 6021.