Financial stability, 1st half 2014

Authors Danmarks Nationalbank
Subject Financial sector
Type Financial Stability
Year 2014
Published 17 June 2014
Abstract icon 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.