Published Download Title

Pension companies will have large liquidity needs if interest rates rise

Pension companies' need for liquidity will increase when the sector has to meet the requirement for central clearing of interest rate swaps and other derivatives by 2023. Pension companies should prepare so as to be able to manage cash variation margin requirements at all times. In the event of substantial interest rate increases, the companies will need large amounts of cash to be posted as variation margin the following day.


The Faroese economy - Labour market squeezed by very low unemployment

The Faroese economy has been in an upswing since 2014. Unemployment is now very low, and there is a risk that this may lead to overheating of the economy. The central government can increase the stability of the economy by pursuing countercyclical fiscal policy. The ageing of the population means that in the long term tax revenue will not be able to match government expenditure. This can be addressed by implementing reforms now.


Greenlandic economy - Strong growth, but reforms are required

Growth has been high for some years, a trend that is set to continue. This is mainly attributable to fisheries. Unemployment is very low, and large-scale airport investments in the coming years will increase pressures in the labour market. Despite government surpluses and modest government debt, there is a need to develop a broader business sector and strengthen government finances substantially in the coming years.


Outlook for the Danish economy - Slightly lower growth in the coming years

The Danish economy has been in a boom phase in recent years. Over time, weaker growth abroad will affect the Danish economy, and prospects are for slightly lower growth rates over the coming years. The labour market is showing the first signs of a slowdown. The boom has evolved without considerable imbalances building up, and the Danish economy is well prepared for a slowdown. Slightly lower growth during a boom period is not an indication that fiscal policy should be eased.


Monetary and financial trends - Decline in interest rates and refinancing boom

In September, Danmarks Nationalbank lowered the interest rate on certificates of deposit by 10 basis points to -0.75 per cent. The interest rate reduction is a consequence of the reduction by the European Central Bank of its key monetary policy rate by 10 basis points. The krone rate remains stable, being slightly on the weak side of the central rate. Overall, financial conditions are accommodative and support the ongoing economic upswing. Declining interest rates have triggered a new refinancing boom during which many households have opted for lower-rate home loans. Credit growth remains moderate and has slowed slightly in 2019.


Trade conflict does not eliminate US current account deficit

The US has a current account deficit and president Donald Trump has an explicit goal of reducing it. However, new trade agreements and new tariffs do not remove the deficit, as the current account is basically determined by the balance between total savings and investments in the US. The growing public budget deficit, on the other hand, tends to increase the US deficit, but a large international demand for dollars helps keeping costs down.


Mortgage refinancing supports private consumption

Falling mortgage rates have made mortgage refinancing attractive in order to reduce overall home financing costs. Many homeowners raise additional mortgage debt when refinancing. The additional funds are used for increased consumption and home improvements. However, some homeowners spend the funds on reducing other debt or building up a liquidity buffer.


Heightened risk of a global recession

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.


Strong business investment appetite

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.


Central government borrowing strategy in the 2nd half of 2019

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 in Denmark has declined

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.


A small number of participants dominate the interbank market

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.


Prospects of lower earnings and higher capital requirements for banks

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.


Banks face new requirements in the stress test

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.


Liquidity stress test shows that Kronos is resilient

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.


Increasing equity prices support investments

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.


Outlook for the danish economy - The Danish economy is heading deeper into the boom

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 impact of the housing taxation agreement on house prices

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


Monetary and financial trends - Low interest rates supports the upswing

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.


The riskiness of corporate credit allocation is increasing

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.


Text-based machine learning improves distress modelling

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 krone rate has modest impact on the current account

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.


Intra-EU labour mobility dampens cyclical pressures

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.


Central government borrowing strategy in 2019

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.


New financing of social housing strengthens the market for Danish government securities

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.


MREL for mortgage credit institutions: necessary and inexpensive

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.


Low interest rates and ample lending capacity put pressure on credit standards

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.


The largest banks satisfy capital requirements in stress test

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.


Greenlandic economy - Strong growth and labour shortages

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.