Around 80 banks and mortgage credit institutions are customers of Danmarks Nationalbank and have access to deposit and lending accounts. In addition, the central government holds an account with Danmarks Nationalbank. In simplified terms, the foreign exchange reserve constitutes Danmarks Nationalbank's assets, while its liabilities are made up of the balances of the banks' and central government's accounts, banknotes and coins and Danmarks Nationalbank's net capital. As in any other organisation, the assets on the one side and liabilities on the other always balance, cf. the example in Chart 1.
The size of the foreign exchange reserve reflects the fixed exchange rate policy. Danmarks Nationalbank can buy and sell foreign exchange in order to keep the krone stable against the euro. If demand for kroner is high, Danmarks Nationalbank can meet this demand by selling kroner and buying euro. For Danmarks Nationalbank, this transaction increases the foreign exchange reserve, while payment for the foreign exchange is effected by increasing the banks' deposits at Danmarks Nationalbank correspondingly – deposits which can be placed in current accounts or certificates of deposit only. Such transactions are determined by Danmarks Nationalbank, not by the banks.
The distribution of Danmarks Nationalbank's liabilities changes on a daily basis. This is because the balance of the central government's account fluctuates from day to day, as disbursement of e.g. salaries does not take place on the same day as, say, receipt of taxes. The central government's payments take place in Danish kroner. Consequently, fluctuations in the central government's account do not affect the size of the foreign exchange reserve, only the distribution of Danmarks Nationalbank's liabilities.
The volume of banknotes and coins in circulation and the size of the net capital are very stable. A reduction of the balance of the central government's account at Danmarks Nationalbank will automatically increase the banks' deposits. Conversely, when the balance of the central government's account increases, the banks' deposits are automatically reduced. Such transactions are determined by the central government, not by the banks.
As stated above, the reason for the day-to-day fluctuations in the central government's account at Danmarks Nationalbank is that payments into and out of the account seldom take place at the same time. In the longer term, the Minister for Finance determines the size of the central government's account. This is done by adjusting the supply of government bonds.
So the banking sector cannot on its own account alter the size of its deposits at Danmarks Nationalbank. The volume of bank deposits at Danmarks Nationalbank is solely determined by how Danmarks Nationalbank manages the fixed exchange rate policy and how the Minister for Finance conducts government debt policy. In other words, there is no link between the banks' deposits at Danmarks Nationalbank and the size of private customers' deposits at and loans from the banks. Thus a growing customer funding surplus does not affect the size of the banks' deposits at Danmarks Nationalbank.
Several banks have pointed out that the increase in the sector's customer funding surplus means that they must deposit more money at Danmarks Nationalbank. As explained above, that is not the case. So what do the banks do with the money? To answer that question, it is useful to look at a simplified version of the banking sector's balance sheet.
Like Danmarks Nationalbank, the banking sector must have assets that match its liabilities. In simplified terms, the banking sector's assets comprise the banks' deposits at Danmarks Nationalbank, lending to customers and their securities portfolios. The assets are offset by customer deposits, debt issuance and net capital.
Chart 2 presents a simplified illustration of the banking sector's balance sheet with deposits exceeding lending. The banks' customer funding surpluses neither can nor should be deposited at Danmarks Nationalbank.
If the banks cannot place increased deposits from private customers at Danmarks Nationalbank, what do they do with the money? There are several options: the deposits can be invested in e.g. bonds and other securities, lending to customers can be increased, or debt issued by the sector can be reduced.