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June 20, 2017

IMF published its staff report and selected issues report in the context of the 2017 Article IV consultation with Denmark. The IMF Directors commended the authorities for good progress on upgrading the financial regulatory framework. As per the staff report, the authorities have taken major strides implementing EU regulations, including those related to Capital Requirements Directive and Regulation (CRD IV/CRR), Solvency II, and the Bank Recovery and Resolution Directive or BRRD.

The staff report also highlighted that, in 2016, Danish Financial Supervisory Authority (DFSA) introduced liquidity coverage ratio (LCR) requirements for systemic and non-systemic banks. All systemic banks have capital buffers in excess of regulatory minima, with the system-wide regulatory tier 1 capital ratio currently at about 21%. Short-term liquidity requirements are met comfortably, with all systemic credit institutions exceeding the current minimum LCR. A current issue under the CRR is the application of the net stable funding ratio (NSFR), where the treatment of short-term mortgage bonds as stable funding remains to be resolved before implementation in 2018. Under the BRRD, a remaining item is the introduction of the minimum requirement for own funds and eligible liabilities (MREL). DFSA has set out preliminary principles, which suggest that MREL for systemically important financial institutions will be set at two-times the total capital requirements—to be met with convertible instruments (that can be bailed-in). Individual bank requirements are expected by year-end. Meanwhile, insurance firms and pension funds have been adjusting their product designs to cope with the low interest rate environment, particularly by shifting away from guaranteed-return products to market-based products. Insurance stress tests show that Danish insurance firms would be less affected in stress scenarios than their peers abroad, including because their interest-rate sensitivity is reduced by using derivatives.

 

The selected issues report examines the household balance sheet structure in Denmark and sensitivity to rising rates. Another area addressed by this report is the migration integration in Denmark and Europe. The report also investigates the dynamics of firm investment in Denmark, using an augmented version of the traditional accelerator model of investment.

 

Related Links

Staff Report (PDF)

Selected Issues Report (PDF)

Keywords: IMF, Denmark, Article IV, Europe, Banking, Insurance, LCR, CRD IV

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