The Central Bank of Denmark (Danmarks Nationalbank) announced that, on January 19, 2022, the Kingdom of Denmark will open a green bond that has a coupon rate of 0.00% and maturity date of November 15, 2031. The issuance volume of green bonds is determined on the basis of the amount of eligible green expenditures, which constitutes an upper ceiling, while taking the overall borrowing strategy into account. The expected issuance volume will be announced after consideration of the announcement of the central government's borrowing strategy in December. The Central Bank also published a report on financial stability analysis for the second half of 2021. The report notes that the countercyclical capital buffer has been re-established at 1% from September 2022, following a recommendation from the Systemic Risk Council. In December 2021, the Council expects to recommend increasing the buffer further to 2%.
The report on the financial stability analysis also mentions that the latest stress test conducted by the Central Bank of Denmark shows that the systemic institutions have sufficient capital to withstand a severe recession scenario, but a few of the systemic banks are close to their buffer requirements. The stress test shows that several systemic institutions would be in breach of the capital buffer requirements if the stress test had been conducted based on the institutions’ capital adequacy targets instead of their current capitalization. The results show that several of the large Danish credit institutions should consider whether their capital adequacy targets are sufficient. The report also specifies that the systemic banks have increased their liquidity reserves and this is reflected in a high Liquidity Coverage Ratio (LCR). The Central Bank’s latest sensitivity analysis shows that the systemic banks can handle severe liquidity stress for at least six months. The current market situation is a good time for the banks to ensure a more robust maturity profile for compliance with the net stable funding ratio (NSFR) and the minimum requirement for eligible liabilities (MREL) requirements, along with the adequacy buffers to these requirements.
According to the financial stability analysis, an increasing share of the new loans of mortgage credit institutions are granted to highly indebted homeowners. More than half of the new loans to these homeowners have deferred amortization. If homeowners have high debt relative to the value of their home, they will be more vulnerable to subsequent house price falls. The Central Bank of Denmark, therefore, believes that a requirement for a larger down payment and an amortization requirement for highly indebted homeowners will contribute to a more resilient housing market. Regarding corporate lending, the financial stability analysis shows a limited amount of lending from credit institutions to the industries that have been hardest hit by the pandemic. The credit institutions have made provisions to cover losses and are well-equipped to grant loans to viable companies, as the government loan schemes terminate.
Keywords: Europe, Denmark, Banking, Green Bond, ESG, Financial Stability, Stress Testing, Systemic Risk, Regulatory Capital, Credit Risk, Liquidity Risk, MREL, Lending, Sustainable Finance, Central Bank of Denmark
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