Featured Product

    IMF Publishes Reports on 2019 Article IV Consultation with Denmark

    IMF published its staff report and selected issued report in context of the 2019 Article IV consultation with Denmark. Directors welcomed the overall soundness of the banking sector and recommended a combination of micro- and macro-prudential tools to increase buffers, in addition to the countercyclical capital buffer (CCyB), if risks continue to build up. Directors considered that high household leverage amid elevated house valuations requires coordinated policy action. To reduce the identified vulnerabilities, they suggested enhancing the macro-prudential toolbox, for example, by increasing the focus on income-based macro-prudential instruments.

    The staff report highlighted that the banking system remains profitable, liquid, and solvent. While profitability has decreased, it remains solid, despite slow credit growth, low interest margins, and the introduction of IFRS 9. System-wide non-performing loans remain low but vary across medium-size banks and systemically important institutions (SIFIs). The liquidity coverage ratio of Danish banks is comfortably above the current minimum requirement of 100%. Banks have ample capital buffers as confirmed by the 2018 EBA and Danish central bank stress tests. However, pockets of vulnerabilities remain. Lending surveys suggest that some banks are relaxing credit standards for corporate loans. Close interlinkages across the Nordic financial system expose banks to regional spillovers as the temporary (end-2018) increase in systemic risk measures, such as joint default probabilities of banks in the region, suggest.

    The assessment shows that the financial regulatory framework in Denmark has been strengthened and additional capital buffers are being built. The Danish Financial Supervisory Authority (DFSA) completed the implementation of the final stage of the Banking Recovery and Resolution Directive (BRRD). Banks are now subject to minimum requirements for own funds and eligible liabilities (MREL) requirements, while mortgage credit institutions are exempted but must hold a debt buffer. The Systemic Risk Council recommended raising CCyB from zero to 1.5% by June 2020, amid risk build-up related to the low interest-rate environment. If risks continue to build up, a combination of micro- and macro-prudential tools should be used to increase buffers, including revisions to risk-weights, Pillar 2 requirements, SIFI and capital conservation buffers, and CCyB. To improve the calibration of tools and support financial stability surveillance, the IMF staff recommends further refining frameworks to assess systemic risk; this should include a macro-prudential stress test to quantify losses due to contagion across mortgage credit institutions, and the pension and household sectors. Extensions to estimate losses due to contagion across banks in the region should also be considered.

    The housing market plays a vital role in Denmark, reinforcing macro-financial linkages. Insurance companies, pension funds, and foreign investors are among the largest holders of covered bonds, which are issued by mortgage credit institutions to fund household mortgages. In an economy with elevated house prices, rules targeting loan-to-value become less binding. Thus, increased focus on income-based measures, including debt-to-income, loan-to-income, and debt-service-to-income might be more effective to address high leverage and encourage faster amortization. A review of the efficacy of policy implementation is encouraged, including a review of institutional arrangements. Experience from other countries indicates that improvements in timeliness can be achieved by assigning independent authorities a macro-prudential mandate, which includes legal powers to implement macro-prudential policy with the corresponding transparency and accountability requirements. The Danish authorities see the macro-prudential framework as well functioning, including the timeframe for the CCyB implementation.


    Related Links

    Keywords: Europe, Denmark, Banking, Insurance, Article IV, CCyB, LCR, MREL, Systemic Risk, Stress Testing, Macro-Prudential Policy, IMF

    Featured Experts
    Related Articles
    News

    EU Amends CRD4 and CRD5 as Part of Capital Markets Recovery Package

    EU published Directive 2021/338, which amends the Markets in Financial Instruments Directive (MiFID) II and the Capital Requirements Directives (CRD 4 and 5) to facilitate recovery from the COVID-19 crisis.

    February 26, 2021 WebPage Regulatory News
    News

    EU Committee Recommends Systemic Risk Buffer of 4.5% in Norway

    The Standing Committee of the European Free Trade Association (EFTA) recommended that a systemic risk buffer level of 4.5% for domestic exposures can be considered appropriate for addressing the identified systemic risks to the stability of the financial system in Norway.

    February 25, 2021 WebPage Regulatory News
    News

    PRA Clarifies Approach to Onshoring of Credit Risk Rules for UK Banks

    In a recent statement, PRA clarified its approach to the application of certain EU regulatory technical standards and EBA guidelines on standardized and internal ratings-based approaches to credit risk, following the end of the Brexit transition.

    February 25, 2021 WebPage Regulatory News
    News

    FSB Sets Out Work Priorities for 2021

    In a recently published letter addressed to the G20 finance ministers and central bank governors, the FSB Chair Randal K. Quarles has set out the key FSB priorities for 2021.

    February 25, 2021 WebPage Regulatory News
    News

    EU Publishes Corrigendum to Revised Capital Requirements Regulation

    EU published, in the Official Journal of the European Union, a corrigendum to the revised Capital Requirements Regulation (CRR2 or Regulation 2019/876).

    February 25, 2021 WebPage Regulatory News
    News

    ESAs Issue Statement on Application of Sustainability Disclosures Rule

    ESAs published a joint supervisory statement on the effective and consistent application and on national supervision of the regulation on sustainability-related disclosures in the financial services sector (SFDR).

    February 25, 2021 WebPage Regulatory News
    News

    EC Consults on Crisis Management and Deposit Insurance Frameworks

    EC published a public consultation on the review of crisis management and deposit insurance frameworks in EU.

    February 25, 2021 WebPage Regulatory News
    News

    HKMA Enhances Loan Guarantee Scheme to Alleviate Pressure on SMEs

    HKMA announced that enhancements will be made to the Special 100% Loan Guarantee of the SME Financing Guarantee Scheme (SFGS) and the application period will be extended to December 31, 2021.

    February 24, 2021 WebPage Regulatory News
    News

    EBA Proposes Standards for Supervisory Cooperation Under IFD

    EBA launched consultations on the regulatory and implementing technical standards on cooperation and information exchange between competent authorities involved in prudential supervision of investment firms.

    February 24, 2021 WebPage Regulatory News
    News

    BoE Addresses Banks in Scope of First Resolvability Assessment

    BoE issued a letter to the CEOs of eight major UK banks that are in scope of the first Resolvability Assessment Framework (RAF) reporting and disclosure cycle.

    February 24, 2021 WebPage Regulatory News
    RESULTS 1 - 10 OF 6629