The foreign exchange reserve and Danmarks Nationalbank’s balance sheet

In its implementation of the fixed exchange rate policy, Danmarks Nationalbank has a foreign exchange reserve at its disposal. The foreign exchange reserve accounts for the largest share of Danmarks Nationalbank’s assets. On Danmarks Nationalbank’s accounting balance sheet, the assets are matched by liabilities in the form of, among other things, the banks’ net position, the balance on the central government’s account, banknotes and coins in circulation and Danmarks Nationalbank’s net capital.

The foreign exchange reserve

Danmarks Nationalbank has a foreign exchange reserve as an element of its fixed exchange rate policy. This enables Danmarks Nationalbank to strengthen the krone by buying kroner and selling foreign exchange from the foreign exchange reserve. Conversely, Danmarks Nationalbank can meet the demand for kroner by selling kroner and buying foreign exchange, thereby increasing the foreign exchange reserve.

Periods of strong pressure on the krone, such as during the financial crisis in autumn 2008, have shown that credibility of the fixed exchange rate policy requires a considerable foreign exchange reserve. The foreign exchange reserve can be expanded by the central government raising debt in foreign currency.

The size of the foreign exchange reserve has varied over time


Kr. billion

The foreign exchange reserve’s purpose of enabling Danmarks Nationalbank to strengthen or weaken the krone at short notice requires tight liquidity and risk management. Therefore, the foreign exchange reserve is primarily placed as deposits at foreign banks and in safe, liquid bonds. In addition, a small part is invested in assets aimed at higher returns – e.g. equity. 

Danmarks Nationalbank’s gold stock of 66.5 tonnes is also included in the foreign exchange reserve. So are Danmarks Nationalbank’s accounts with the International Monetary Fund.

The size of the foreign exchange reserve and the previous month’s interventions are published on the second banking day of each month at 17:00 in the press release ‘Foreign exchange and liquidity and monthly balance sheet’.

Danmarks Nationalbank’s balance sheet

As in any other financial statements, Danmarks Nationalbank’s balance sheet consists of assets and liabilities. Assets are the values owned by Danmarks Nationalbank, while liabilities are the values owed to others by Danmarks Nationalbank. The assets and liabilities reflect Danmarks Nationalbank’s main tasks, including the implementation of monetary policy, exchange rate policy and the issuance of banknotes and coins. In addition, Danmarks Nationalbank serves as the central government’s bank, which therefore also impacts Danmarks Nationalbank’s balance sheet.

Example of Danmarks Nationalbank’s balance sheet, from the end of June 2020

Assets and liabilities go hand in hand – also for intervention in the foreign exchange market

Assets and liabilities are always equal in accounting terms. The size of Danmarks Nationalbank’s balance sheet depends primarily on the volume of Danmarks Nationalbank’s intervention in the krone market.

When Danmarks Nationalbank keeps the krone stable against the euro by, for example, buying kroner from a bank against payment in foreign currency, the foreign exchange reserve – and thus total assets – shrinks. However, that bank’s deposit of Danish kroner in its current account with Danmarks Nationalbank – and thus total liabilities – is reduced accordingly. And vice versa in cases where Danmarks Nationalbank buys foreign exchange from a bank against payment in kroner.

Example of how both assets and liabilities are reduced by the sale of foreign exchange from the foreign exchange reserve

Banks' net position

The net position refers to the total net deposits of monetary policy counterparties at Danmarks Nationalbank. Consequently, as a general rule, the net position is calculated as current account deposits and certificates of deposit less monetary policy loans. This also means that, for example, lending from one bank to another, financed by the bank drawing on its account with Danmarks Nationalbank, is merely a redistribution of the net position, leaving the total net position unchanged.

Danmarks Nationalbank is the central government’s bank

The balance of the central government account with Danmarks Nationalbank is determined by current receipts and outlays as well as the central government’s net borrowing. When the central government receives a payment of, for example, income tax, the banks’ deposits at Danmarks Nationalbank are reduced accordingly. This leaves the asset side of Danmarks Nationalbank’s balance sheet unaffected. It is merely a redistribution between the central government and the banks on the liabilities side of the balance sheet.

Conversely, banks will obtain a larger deposit when the central government pays public salaries, pensions or subsidies, while the balance on the central government’s account is reduced. Danmarks Nationalbank regularly publishes projections of central government receipts and outlays.

Similarly, central government borrowing affects the banks’ deposits at Danmarks Nationalbank. When the central government sells government bonds in Danish kroner, the central government’s account is credited with the proceeds, while the banks’ deposits are reduced accordingly and vice versa.

According to the the Treaty on the European Union, the central government’s account with Danmarks Nationalbank must not be overdrawn from day to day. The rule is intended to ensure that EU member states do not finance government deficits by borrowing from central banks, so-called monetary financing. In Denmark, an additional framework for government borrowing has been agreed on in the form of the so-called norm. In essence, this agreement implies that central government domestic borrowing in kroner for the year as a whole normally matches the central government’s gross domestic financing requirement, i.e. the government’s current deficit and repayments of domestic debt.

As a general rule, the central government borrows in foreign currency to strengthen the foreign exchange reserve, but also to ensure the central government’s market access in foreign currency. The government can also raise short-term foreign loans as contingent liquidity for the foreign exchange reserve and the central government’s account. This is done through the central government’s commercial paper programmes.

Assets and liabilities go hand in hand – also for central government borrowing

When the central government raises debt in foreign currency, the loan proceeds are typically exchanged for Danish kroner via Danmarks Nationalbank. This means that both the balance of the central government’s account and the foreign exchange reserve are increased by the loan proceeds.

Example of how both assets and liabilities increase when Danmarks Nationalbank, on behalf of the government, grants loans in foreign currency

Banknotes and coins in circulation

Banknotes and coins in circulation account for a substantial share of Danmarks Nationalbank’s liabilities. When Danmarks Nationalbank provides cash to a bank, a corresponding amount is deducted from that bank’s current account and vice versa. Accordingly, changes in the demand for cash may affect the banks’ net position at Danmarks Nationalbank. Such changes typically take a relatively long time.

For example, lower economic activity or the introduction of new methods of payment may reduce the demand for cash. Over time, this will result in a lower circulation of banknotes and coins, viewed in isolation, since banks return more banknotes and coins to Danmarks Nationalbank than they receive. All else equal, this will increase the banks’ total deposits at Danmarks Nationalbank and thus also their net position.

Danmarks Nationalbank's net capital

Danmarks Nationalbank’s net capital consists of all assets less all liabilities, including banknotes and coins in circulation, the balance of the central government’s account and the banks’ net position. 

Any loss that Danmarks Nationalbank may incur can be absorbed by the net capital. Conversely, a profit for Danmarks Nationalbank requires a decision on possible transfer of parts of the profit to the central government, while the remaining share is added to the net capital. 

The transfer rate is set in expectation of Danmarks Nationalbank’s net capital growing over time in line with the nominal gross domestic product, GDP.