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Higher interest rates have strengthened banks' resilience, but also pose a risk

​Tighter monetary policy and higher interest rates have helped reduce inflation in recent years and have led to changed conditions for households, businesses and the financial sector. This implies among other things an increase in financial costs as well as higher returns from savings and investments. Danmarks Nationalbank's biannual analysis of financial stability in Denmark focuses on the impact of higher interest rates on the resilience of banks and their customers.

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30 May 2024

Tighter monetary policy and higher interest rates have helped reduce inflation in recent years and have led to changed conditions for households, businesses and the financial sector. This implies among other things an increase in financial costs as well as higher returns from savings and investments. Danmarks Nationalbank's biannual analysis of financial stability in Denmark focuses on the impact of higher interest rates on the resilience of banks and their customers.

"Higher interest rates have increased financial costs to many companies and reduced homeowners' disposable income. If interest rates remain at current levels, we expect banks to see more losses on bank lending. This will increase impairment charges from the currently very low levels," says Peter E. Storgaard, Head of Financial Stability at Danmarks Nationalbank.

Higher interest rates also contributed to bank earnings in 2023 comparing with the best years historically. As a result, banks have been able to both pay out dividends and increase capitalisation, for example, to meet new capital requirements. Danmarks Nationalbank conducted a stress test of the financial sector in which all systemic credit institutions are able to comply with the authorities' capital requirements in the stress test's severe recession-scenario.

"High earnings allow banks to build up capital, whether to ensure healthy excess capital levels or to comply with new capital requirements," says Peter E. Storgaard, who continues:

"Financial stability has been strengthened as a result of new requirements for banks, and by 2033, the final capital requirements developed after the financial crisis will be implemented."

Every six months, Danmarks Nationalbank publishes the Financial Stability analysis, which presents Danmarks Nationalbank's assessments and recommendations regarding financial stability in Denmark. Today, Danmarks Nationalbank also published an analysis of how lending rules have helped increase resilience for homeowners and credit institutions. Both analyses can be found at nationalbanken.dk.

Enquiries can be directed to press and communications officer Peter Levring on +45 3363 6383 or at pnbl@nationalbanken.dk.