Danish Central Bank Assesses Financial Stability, to Issue Green Bonds
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
Featured Experts
James Partridge
Credit analytics expert helping clients understand, develop, and implement credit models for origination, monitoring, and regulatory reporting.
Emil Lopez
Credit risk modeling advisor; IFRS 9 researcher; data quality and risk reporting manager
Nihil Patel
Data scientist; SaaS product designer; credit portfolio analyst and product strategist; portfolio modeler; correlation researcher
Related Articles
BIS and Central Banks Experiment with GenAI to Assess Climate Risks
A recent report from the Bank for International Settlements (BIS) Innovation Hub details Project Gaia, a collaboration between the BIS Innovation Hub Eurosystem Center and certain central banks in Europe
Nearly 25% G-SIBs Commit to Adopting TNFD Nature-Related Disclosures
Nature-related risks are increasing in severity and frequency, affecting businesses, capital providers, financial systems, and economies.
Singapore to Mandate Climate Disclosures from FY2025
Singapore recently took a significant step toward turning climate ambition into action, with the introduction of mandatory climate-related disclosures for listed and large non-listed companies
SEC Finalizes Climate-Related Disclosures Rule
The U.S. Securities and Exchange Commission (SEC) has finalized the long-awaited rule that mandates climate-related disclosures for domestic and foreign publicly listed companies in the U.S.
EBA Proposes Standards Related to Standardized Credit Risk Approach
The European Banking Authority (EBA) has been taking significant steps toward implementing the Basel III framework and strengthening the regulatory framework for credit institutions in the EU
US Regulators Release Stress Test Scenarios for Banks
The U.S. regulators recently released baseline and severely adverse scenarios, along with other details, for stress testing the banks in 2024. The relevant U.S. banking regulators are the Federal Reserve Bank (FED), the Federal Deposit Insurance Corporation (FDIC), and the Office of the Comptroller of the Currency (OCC).
Asian Governments Aim for Interoperability in AI Governance Frameworks
The regulatory landscape for artificial intelligence (AI), including the generative kind, is evolving rapidly, with governments and regulators aiming to address the challenges and opportunities presented by this transformative technology.
EBA Proposes Operational Risk Standards Under Final Basel III Package
The European Union (EU) has been working on the final elements of Basel III standards, with endorsement of the Banking Package and the publication of the European Banking Authority (EBA) roadmap on Basel III implementation in December 2023.
EFRAG Proposes XBRL Taxonomy and Standard for Listed SMEs Under ESRS
The European Financial Reporting Advisory Group (EFRAG), which plays a crucial role in shaping corporate reporting standards in European Union (EU), is seeking comments, until May 21, 2024, on the Exposure Draft ESRS for listed SMEs.
ECB to Expand Climate Change Work in 2024-2025
Banking regulators worldwide are increasingly focusing on addressing, monitoring, and supervising the institutions' exposure to climate and environmental risks.