The distance between capital requirements and own funds has been reduced for the largest Danish credit institutions in recent years. The lower excess capital adequacy implies increasing capital requirements, while capitalisation has been stable.
There is substantial variation in excess capital adequacy across the systemic institutions, but a few institutions' excess capital adequacy is less than 2 percentage points relative to the capital requirements, as the analysis Financial stability from Danmarks Nationalbank shows. This is a low level of excess capital adequacy, not least in the light of expectations of higher capital requirements in the coming years. The institutions can improve their capitalisation by disbursing a smaller share of earnings or by issuing more equities.
"All institutions comply with their current capital targets, including those with low excess capital adequacy. But we find that these institutions should reconsider their capital targets to ensure an appropriate distance between capitalisation and capital requirements", says Karsten Biltoft, Assistant Governor and Head of Financial Stability, Danmarks Nationalbank.
The need to reconsider capital targets is underscored by Danmarks Nationalbank's most recent stress test of the institutions' capitalisation. It shows that a few of the systemic institutions will fall short of their capital buffer requirements in a severe stress scenario, even if the countercyclical capital buffer is assumed to be released.
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