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    Danish Central Bank Assesses Financial Stability of Banks

    June 10, 2022

    The Central Bank of Denmark (Danmarks Nationalbank) published a report on financial stability analysis for the first half of 2022. The central bank also published its response to the European Commission (EC) consultation on the evaluation of State aid rules for failing banks.

    The report on financial stability analysis highlights that Danish homeowners are increasingly opting for more risky loans. Housing lending is thus still driven by loans with deferred amortization while variable rate loans have become more widespread. An amortization requirement for homeowners with a high loan-to-value ratio may contribute to a more resilient housing market. The report notes that the liquidity position of the largest banks remains robust and the large systemic credit institutions' earnings increased in 2021. The outbreak of war in Ukraine has not led to a fall in institutions' earnings expectations for 2022. For a number of institutions, core earnings have shown progress in the first quarter of 2022 and several institutions have revised their profit expectations upward. One notable observation is that the latest stress test conducted by the Central Bank of Denmark shows that some large credit institutions come close to breaching the capital buffer requirements in a severe recession; therefore, such credit institutions need their current excess capital to withstand stress.

    In its response to the EC consultation on evaluation of the State aid rules for banks in difficulty, the central bank highlights that banks in difficulty should be managed through the crisis management regime. Assessment indicates that the framework for recovery and resolution entails credible resolution plans for all banks of the member states. Therefore, all banks in difficulty must be reconstructed according to the regime; thus, with credible resolution plans in place, a bank in difficulty should not be able to cause a serious disturbance to the economy of a member state. The State aid rules for banks in difficulty should, therefore, not be upheld since the resolution regime is sufficient. However, it cannot be ruled out that the need to grant State aid may arise in absolutely extraordinary situations. In such cases, it is essential for EC to set out specific guidance for banks in difficulty and to verify that the requirements to grant State aid are met.

    Keywords: Europe, Denmark, Banking, State Aid Rules, Basel, Financial Stability, Lending, Credit Risk, Regulatory Capital, Resolution Framework, Recovery and Resolution, EC, Central Bank of Denmark

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