## EXECUTIVE SUMMARY ## Source details **Canonical URL:** [EXECUTIVE SUMMARY](https://www.imf.org/-/media/files/publications/cr/2020/english/1dnkea2020002.pdf) ## Other formats - [Markdown version](/-/media/files/publications/cr/2020/english/1dnkea2020002.pdf.md) - [Structured JSON version](/-/media/files/publications/cr/2020/english/1dnkea2020002.pdf.json) --- ### COVID-19 caveat - The FSAP work was conducted prior to the COVID-19 pandemic; this Technical Note (TN) does not assess the impact of the crisis or recent crisis-related policy measures. - Findings and recommendations remain pertinent given the TN’s focus on vulnerabilities and policy frameworks. ### DFSA mandate, governance and resources - Mandate and scope: - Integrated regulatory body with mandate for prudential and conduct of business supervision across: commercial banks, mortgage credit institutions (MCIs), insurance companies, pension funds, investment funds, investment companies and brokers, and securities market regulation. - Tasks and powers conferred by the Financial Business Act (FBA), including power to issue executive orders (legally binding) and guidelines (non-binding but de facto influential). - Materiality discretion: - Denmark sets a threshold of working capital of more than DKK 250 million (approximately USD 36 million) for banks and mortgage credit institutions to be subject to an annual supervisory review process on solvency. - Institutional placement and governance: - DFSA is an agency of the Ministry of Industry, Business, and Financial Affairs (MIBFA) and one of seven agencies under MIBFA. - The Supervisory Board comprises 7 members: three with legal, financial and financial expertise, 2 with managerial background from the financial sector, 1 member with managerial background from the rest of the world and 1 member from the Danmarks Nationalbank (DN). - The Minister appoints a Ministry observer to the Supervisory Board (speaking, but not voting, rights). - Appointments to the Board are for a duration of two years (re-appointment permitted); the Director General is appointed by the Minister after consultation with the Supervisory Board. - Governance reforms noted: - From 2020 appointees to the DFSA Board will be subject to enhanced scrutiny with new requirements (fitness and integrity) in force from January 2020; a dismissal procedure for a Board member will be introduced (at the Minister’s discretion). ### Key findings on operational independence and resources - Operational independence is undermined in two broad categories: governance and resource. - Resources: - Funding structure does not isolate the DFSA from potential influence of government (a ministry representative sits on the Board with observer status) or industry. - DFSA has been required to operate on a “least cost” basis, undermining policy and process development, scope and execution of tasks. - Resources constrain the DFSA inappropriately despite incremental staffing increases in AML and insurance; risks to the financial system are outpacing staffing. - Human resources concerns include high turnover of junior staff and lack of depth at middle management, despite high individual quality. - Governance: - Appointments to the Board are made by the Minister and are of short duration (2 years). - Dismissal processes for Board members are being introduced but remain at the discretion of the Minister. - Best practice recommendation: Board members’ term of service is disconnected from the political cycle and tenure extended. ### Supervisory approach and priorities - Emphasis: - Banking: emphasis on credit risk. - Insurance: emphasis on market risks and asset-liability management. - Gaps and needed enhancements: - Sharpen supervision of non-financial risks (compliance, governance, conduct, compensation practices, risk culture). - Develop more detailed guidance on risk assessment of individual supervised entities to support supervisory judgement and ensure consistent outcomes—use examples and clear parameters; ensure all relevant risks are captured with appropriate and consistent weightings. - Corporate governance assessments need to complement ‘bottom-up’ analysis with ‘top-down’ assessments that examine Board of Directors (BoD), senior management and broader governance structures. - Risk experts should both proactively and reactively provide advice, analysis and support to supervisors; risk decisions and advice should be centrally recorded. - Prioritize and increasingly invest in DFSA IT/data systems to support supervision’s analytical capabilities and leverage supervisory data to identify trends and emerging risks. ### Anti-money-laundering (AML) and related supervision - Scope and legal basis: - DFSA is responsible for AML/CFT supervision of all financial companies; approximately 1,800 financial companies are subject to DFSA AML Division supervision. - AML/CFT powers derive from the Act on Measures to Prevent Money Laundering and Financing of Terrorism (Section 34(1), Act No. 442 of 11 May 2007) and were expanded via Act No. 651 (2017) and Act No. 1563 (2019) to transpose the EU’s 4th and 5th AML Directives. - A law effective January 2020 (Act No. 1563 (2019)) heightened standards for firms and broadened DFSA powers of remedial action, strengthened whistleblower protection, required written policies for healthy corporate culture, expanded DFSA powers to appoint/place monitors, ban acceptance of new customers until breaches are rectified, and issue administrative fines (“fixed-penalty”) for AML/CFT violations. - Resourcing and tools: - At the 2017 FATF Mutual Evaluation, DFSA had only 3 to 4 persons working on AML/CFT. - As of January 2020, there are 20 staff working on AML/CFT, measured in full time equivalents. - DFSA conducted a major development project with external consultants delivering an inspection manual, a risk assessment scoring model, and a revised risk-based approach. - Implementation priorities: - DFSA must take ownership of outputs from ongoing AML projects (models and manuals). - Ensure the risk scoring model has an appropriate range of data and supervisory overlay. - Establish systematic DFSA coordination on AML; ensure maximum, systematic internal coordination so all information relevant for AML/CFT oversight is captured, including information from prudential supervision on governance, risk culture, risk management and systems and controls. - Intensify on-site inspections of higher-risk FIs and expand onsite examinations to a greater number of banks (inspection example: an “inspection” might take 300 hours, less than 20 of which might be spent onsite). - If DFSA cannot inspect substantially more than 2 percent of the total population of companies in a given year, it would remain locked into a 20-year or longer cycle to review the entire system, even allowing for annual targeted visits to DSIFIs. ### Use of powers, corrective action and authorizations - Powers and instruments (legal basis includes FBA Section 344(1), Anti-Money Laundering Act Section 47(1), specific provisions e.g., FBA Section 350; fixed penalty notices implemented by Executive Order no. 186 as of March 8th, 2011): - Service information, Risk information, Orders and prompt enhancements, Reprimands (publicly disclosed), Penalty fines (daily or weekly), Fixed penalty notices, Police reports (requires Supervisory Board approval), Revocation/withdrawal of license. - Corrective action practices: - In just under a five year period, the DFSA recorded over 2,000 supervisory measures taken against banks and mortgage credit institutions; over 80 percent of these actions were Orders. - DFSA keeps a central log of corrective actions but it is not yet readily searchable to identify patterns within or across peer groups or sub-sectors. - Authorization and licensing: - DFSA issues banking authorizations following a decision of the Board (FBA, section 14). - EUR 5 million is the threshold for absolute capital a credit institution must hold, in the form of common equity tier 1. - Over the last five years the DFSA has granted four licenses and withdrawn thirteen. - Recommendations on use of powers: - Analyze corrective action data to identify patterns and root causes of deficiencies. - Raise the bar on when it is legitimate to rely on information without independent scrutiny; increase systematic scrutiny, challenge and verification when receiving information from firms. - Exploit the corrective actions database effectively to ensure common issues—or root causes—or emerging patterns are identified. - In authorization, change of control and fit-and-proper assessments, DFSA should communicate rising expectations; place onus on applicants to demonstrate they fully meet substance, not only superficial terms; consider new techniques to employ more rigorous tests. - Grant DFSA ability to reverse a change of control where its approval was required but was not obtained; amend FBA to require banks to notify DFSA of material information that may negatively affect the suitability of a major shareholder or controlling party. - Broaden DFSA’s powers in relation to change of control, fit and proper reviews, financial holding companies, non-financial parent companies and related parties. — Responsible: MIBFA/DFSA — Timing*: Mid term ### Selected Main Recommendations (Table 1 highlights) - Independence and Resources - Base the Board appointment process on a Parliamentary process. Lengthen tenure of Directors’ appointment and de-link from the political cycle. Remove the MIBFA representative from the Board. — Responsible: MIBFA — Timing*: Mid Term - State the reasons for the dismissal of a Board Director and Director General clearly in law and publicly disclose in the event a dismissal should ever take place. — Responsible: MIBFA — Timing*: Mid Term - Expand budget envelope for DFSA to recruit and retain quality staff across full range of skills and experience and with a focus on non-financial risks. — Responsible: MIBFA — Timing*: Short term - DFSA to publicly communicate its supervisory capability, based on its resource envelope and published risk appetite statement. — Responsible: DFSA — Timing*: Short term - Broaden use of external expertise in priority areas to supplement risk expertise. — Responsible: DFSA — Timing*: Short term - Regulation and Supervision – Banking and Insurance - Develop more detailed guidance on risk assessments (using examples and clear parameters) to support supervisory judgement and ensure consistent outcomes. — Responsible: DFSA — Timing*: Under 6 months - Formalize cooperation processes to enhance transparency; ensure a more consistent approach to engagement with firms; and mitigate risks associated with staff turnover and key person risk. — Responsible: DFSA — Timing*: Under 6 months - Prioritize and increasingly invest in IT/data systems to support analytical capability. — Responsible: DFSA — Timing*: Short term - Increase horizontal analysis across risks, entities and industries to identify trends and emerging risks. Enhance data analysis on non-financial risks. — Responsible: DFSA — Timing*: Short term - External auditor certification regime must balance standards and availability of professionals for banks and insurers. — Responsible: DFSA — Timing*: Mid term - Exploit database of corrective and remedial actions effectively to ensure that common issues—and root causes—or emerging patterns are identified in firms. — Responsible: DFSA — Timing*: 18 months - Banking Regulation and Supervision (selected) - Enhance systematic and prioritized approaches to confirm explicitly the veracity of supervisory data and information received. — Responsible: DFSA — Timing*: Short term - Conduct more frequent in-depth inspections of high-risk firms and use inspections flexibly to respond to risks indicated in offsite work and external events. — Responsible: DFSA — Timing*: Ongoing - Enhance skills —using external experts as needed—to intensify supervision of and give greater priority to non-financial risks (governance, risk culture, IT risk etc). — Responsible: DFSA — Timing*: Short term - Document risk interpretations centrally to enhance consistency and enable horizontal risk analysis. — Responsible: DFSA — Timing*: Under 1 year - Ensure corporate governance assessments include ‘top-down’ assessments; Issue guidelines or an order to impose a requirement for the BoD to assess its own performance as well as the performance of the BoM. — Responsible: DFSA — Timing*: Mid term - Require banks to factor liquidity and other risks into the internal pricing of their financial products. — Responsible: DFSA — Timing*: Under 1 year - Grant DFSA access to the external audit papers of the banks under its supervision. — Responsible: MIBFA — Timing*: Mid term *Timing labels taken verbatim from the source. ### Financial technology, market structure and key statistics - Fintech: - DFSA established a dedicated fintech team in 2017 with a government mandate and funding; provides “handheld supervision” and established a sandbox initiative (FT Lab). - Unit may be under-utilized; continued awareness raising throughout DFSA staff is needed. - Resource challenge and recruitment: - Resource burdens increasing globally; DFSA faces pressure from continued regulatory flows for at least a further 3 to 5 years as EU legislative processes finalize required regulations and directives. - Recruitment and retention of specialist skills (e.g., cyber specialism, actuarial science) is difficult due to thin and expensive markets. - DFSA lacks a full degree of discretion over internal fund allocation; recent increases for AML and the fintech unit illustrate funding can be hypothecated. - Market structure and key statistics: - Denmark’s financial system assets stand at assets over 600 percent of GDP. - The banking sector—comprising 76 banks and mortgage credit institutions (MCIs)—accounts for 60 percent of financial sector assets. - The banking sector is dominated by seven domestic systemically important financial institutions (D-SIFIs); the largest is the Danske Bank Group (with assets of about 170 percent of GDP). - Insurance companies and pension funds (ICPFs) are large relative to European peers at 200 percent of GDP. - As of end-2019, there were 654 commercial banks, credit co-operatives and savings banks in Denmark. - SIFI buffer requirement: - One to three percent of risk weighted assets, depending on degree of systemic importance, met by common equity tier 1 capital. - Danske Bank geographic exposure breakdown (in percent): Denmark (52), Sweden (15), Norway (11), Finland (9), UK (4), Baltics (1), rest of Europe (7), and other (2). Danske’s Estonian branch was closed in 2019. ### Institutional safety net and funds - Resolution authorities: - DFSA and the Financial Stability Company (FSC) are designated resolution authorities under EU legislation. - For systemically important institutions, the Minister of Industry, Business and Financial Affairs determines the choice of resolution tools. - Systemic Risk Council (SRC): - Established in February 2013 as an advisory body; membership includes DN (chair), two DFSA representatives, one representative each from MIBFA and Ministry of Finance, and three independent experts. - Deposit and resolution funds: - Danish Guarantee Fund (Garantiformuen - DGF) provides deposit protection up to EUR 100,000 per depositor under the Deposit Guarantee Directive; DGF is administered by Finansiel Stabilitet (FSC). - At time of mission, DGF managed assets equivalent to 1.25-1.5 percent of the covered deposits in Denmark. If the level falls below 0.8 percent of covered deposits, institutions must provide further top-up funds. - The resolution fund (Afviklingsformuen) is administered by FSC and currently manages 0.4-0.5 percent of the covered deposits in Denmark, with a target of 1 percent. ### Supervisory approach — risk assessment, planning, and techniques (selected findings) - Inspection cycles and activity trends: - Supervisory cycle for onsite inspections can vary between one and five years. - For largest, non-systemic banks with a high risk assessment: ordinary inspection every two years plus an annual bank credit review. - For high risk systemic institutions: intensified supervision reflecting systemic importance; SIFIs: functional inspections on a rolling basis rather than ordinary inspections. - Since 2014: Themed inspections increased from 9 to 74; Functional inspections increased from 15 to 27; Ordinary inspections decreased from 26 to 20. - Surveillance: - Continuous surveillance primarily through quarterly data analysis; supervisors receive standardized data packages and peer reviews; quarterly key risk indicators are presented at a standing bank committee involving the executive board. - Concerns and recommendations: - Central focus on credit risk may mean other key risks are not given appropriate scrutiny. - DFSA’s ability to assess and challenge institutions on non-financial risks (governance, conduct, reputational risk, compensation practices, risk culture) is not as evident. - Recommendation: complement strong skills and focus on credit risk with equal rigor on other risk areas; develop detailed guidance on risk assessments; increase themed inspections and follow up with onsite reviews where indicated. ### Internal coordination, risk expertise and data analytics - Internal coordination: - Much coordination relies on informal interactions; DFSA is working on a policy to enhance internal coordination with a planned completion date of spring 2020. - Recommendation: formalize liaison roles and touchpoints to reinforce collegiate culture and mitigate staff turnover and key person risk. - Risk expertise: - Specialist risk expertise dispersed across more than 40 centers of expertise; risk decisions and advice are not consistently documented centrally. - Recommendations: centrally document risk interpretations and advice; require risk centers to proactively and reactively provide advice and horizontally analyze data; oblige risk experts to flag where their advice has not been taken. - Data analytics: - DFSA receives significant data from banks (EBA templates and national templates); user-friendly interface exists for supervisors. - Recommendations: prioritize and increasingly invest in internal IT/data systems; leverage data created by DFSA itself (e.g., comprehensive analysis of orders given within and across industries); enhance horizontal analysis across risks, entities and industries and increase data analysis on non-financial risks. ### Supervision of specific risks — Corporate governance, audit, internal controls - Corporate governance: - Denmark: two tier management system (BoD and BoM); corporate governance requirements set out in FBA and EO-MC. - Fit and propriety: DFSA must assess members of BoD and BoM and key function holders per Section 64 of the FBA. - Compensation principles (FBA Section 77(a)): maximum levels of variable compensation to base salary (50 percent); minimum proportions of equity to overall variable compensation (50 percent); use of deferred payments (40 - 60 percent over three year periods, depending on the amount). - New FBA requirement (s.70a): written policy to ensure and promote a good, healthy business-culture. - DFSA practice: governance assessments tend to be more ‘bottom-up’ than ‘top-down’; specialist corporate governance and remuneration team of six members focuses on fit and proper assessments and policy work; deeper analysis of remuneration drivers/incentives is limited. - Recommendations: issue guidance or an executive order requiring BoD to assess its own performance; complement ‘bottom-up’ assessments with consistent ‘top-down’ reviews; upskill staff for new business culture requirements. - External audit and internal controls: - Auditor certification: certified auditors must evidence 750 hours of audit work from at least three different banks within the previous five years and meet ongoing education requirements. - There are currently 39 approved individuals; of those 39, 29 are currently signing audit reports for banks; representing four audit firms in total. - DFSA does not have access to the working papers of banks’ external auditors; recommendation from 2014 FSAP to obtain such access remains valid. - DFSA has intensified cooperation with the Danish Business Authority; legal analysis undertaken on information exchange limits. - Recommendations (audit-related): - DFSA should have access to external audit papers of supervised banks. - Ensure auditor certification regime balances standards and market availability; avoid creating a precarious shortage of qualified professionals. - Ensure bilateral meetings with external auditors are open and constructive with two-way information exchange. - Incorporate explicit requirement for dual control of assets in the EO-MC. ### Operational risk, IT risk, liquidity and covered bonds - Operational risk: - Regulatory and supervisory developments since last FSAP; DFSA obtains annual data on number and scale of loss events. - No Danish bank has applied for approval to use Advanced Modelling Approaches (AMA) for operational risk capital adequacy. - Recommendation: ensure SIFIs’ risk practices are fully understood and align SIFI divisions with policy center on operational risk. - IT risk: - DFSA Board approved a plan in early 2019 to strengthen IT supervision; IT risk team resources appear lean relative to scale of risks. - Recommendation: consider leveraging external expertise to support onsite IT supervision, particularly for non-SIFI banks. - Liquidity and covered bonds: - For Danish system, covered bonds comprised nearly half (48 percent) of the total liquidity buffer at end-2018 (EBA monitoring). - Under EU regulation, eligible covered bonds can meet up to a limit of 70 percent of the HQLA; in Basel, covered bonds are HQLA Level 2B only. - Recommendation: DFSA should execute a system wide analysis of contingency plans to ensure feasibility in a systemwide liquidity event given high reliance on covered bonds. ### Contingency planning, corrective actions and licensing (selected) - Contingency planning: - DFSA requires banks to prepare contingency plans but has not prepared analysis considering scenarios where sectors (or all) of the banking system would need to utilize their contingency plans at the same time. - Recommendation: execute system wide analysis of contingency plans to ensure feasibility in a systemwide liquidity event. - Corrective actions: - Over 2,000 supervisory measures recorded in under five years; over 80 percent were Orders (public and influential). - Recommendation: exploit corrective actions database to identify patterns, root causes, and prevent symptom-only work. - Licensing and change of control: - EUR 5 million common equity tier 1 threshold for authorization. - Over last five years: four licenses granted and thirteen withdrawn. - Recommendation: update licensing manual; require more detailed recording in recommendation notes; conduct final onsite inspections before operations commence; place burden of proof on applicants. - Recommendation: grant ability to reverse change of control where approval required but not obtained. ### Related parties, consolidation, and fit & proper scope - SIFI designation quantitative criteria (if met in two consecutive years): - Balance sheet greater than 6.5 percent of GDP (Greenland: 65 percent and Faroe Islands 13 percent); - Lending greater than 5 percent of total sector lending; - Deposits greater than 3 percent of total sector deposits. - Footnote thresholds for Greenland and Faroe Islands: - Greenland: Balance sheet greater than 65 percent of GDP, lending greater than 50 percent market share and deposits greater than 50 percent. - Faroe Islands: Balance sheet greater than 13 percent, lending greater than 50 percent and deposits greater than 10 percent. - Recommendations on related parties and consolidation: - Broaden the definition of related party to include: - Key employees in small and medium sized banks (not systemic important banks); - Persons related by marriage etc. to members of the board of directors; - Persons with a direct/indirect interest in the institution below 20 percent; - Transactions and services, not just transactions that result in on or off-balance sheet exposures, that are undertaken for an institution by a related party. - DFSA should have authority to apply prudential rules more generally to financial holding companies. - DFSA should have authority to conduct fit and proper reviews on an ongoing basis of owners and senior management of non-financial parent companies. ### Appendix I — DFSA Powers of Corrective and Remedial Actions (selected) - Legal and operational basis: FBA Section 344(1), Anti-Money Laundering Act Section 47(1), FBA Section 350; Executive Order no. 186 (March 8th, 2011) for fixed penalty notices. - Corrective instruments include Service information, Risk information, Orders and prompt enhancements, Reprimands (public), Penalty fines (FBA section 374; Anti-Money Laundering Act section 80(1)), Fixed penalty notices (FBA section 373a), Police reports (Supervisory Board approval required), Revocation/withdrawal of license (FBA sections 223-225, 350, 351). - Early intervention powers (FBA section 243a) allow DFSA to require recovery plan activation, submission of action plans, convening shareholder meetings, require resignations, submit restructuring negotiation plans, change business strategy or legal/operational structure, and contact potential buyers. ### Appendix II — Summary of Quantitative Liquidity Requirements in Denmark - Relationship to EU/Basel: - Liquidity Coverage Ratio (LCR) is fully in force. - Net Stable Funding Ratio (NSFR) will apply from June 2021. - NSFR expected impact: not expected to be significant as most Danish banks have large deposit surpluses. - Danish liquidity metrics: - Funding ratio: indicates ratio between lending – funding need – and the stable funding in the form of working capital subtracted bonds with a residual maturity of less than one year. The value should be below 1. - Liquidity indicator (liquidity requirement ratio): As of June 2018, new liquidity indicator requires banks to hold a sufficient liquidity buffer to cover a three months liquidity stress scenario. The value must be above 100 percent. - Liquidity indicator modifications: 1) the cap on asset classes does not apply; and 2) definition of liquid assets is extended to include own issued covered bonds and covered bonds with issue size smaller than EUR 250m. _Source: 1dnkea2020002 - Executive Summary and selected sections from Denmark FSAP Technical Note._ ### EXECUTIVE SUMMARY __________________________________________________________________________ 5 ### EXECUTIVE SUMMARY ### COVID-19 caveat - The FSAP work was conducted prior to the COVID-19 pandemic; this Technical Note (TN) does not assess the impact of the crisis or recent crisis-related policy measures. - Findings and recommendations remain pertinent given the TN’s focus on vulnerabilities and policy frameworks. ### DFSA mandate, governance and resources - The Danish Financial Supervisory Authority (DFSA) is an integrated regulatory body with mandate for prudential and conduct of business supervision across: - commercial banks, mortgage credit institutions (MCIs), insurance companies, pension funds, investment funds, investment companies and brokers, and securities market regulation. - DFSA tasks and powers are conferred by the Financial Business Act (FBA), including power to issue executive orders (legally binding) and guidelines (non-binding but de facto influential). - Denmark exercises materiality discretion under the EU Capital Requirements Directive IV by setting a threshold of working capital of more than DKK 250 million (approximately USD 36 million) for banks and mortgage credit institutions to be subject to an annual supervisory review process on solvency. - Institutional placement and governance: - DFSA is an agency of the Ministry of Industry, Business, and Financial Affairs (MIBFA) and one of seven agencies under MIBFA. - The Supervisory Board comprises 7 members: three with legal, financial and financial expertise, 2 with managerial background from the financial sector, 1 member with managerial background from the rest of the world and 1 member from the Danmarks Nationalbank (DN). - The Minister appoints a Ministry observer to the Supervisory Board (speaking, but not voting, rights). - Appointments to the Board are for a duration of two years (re-appointment permitted); the Director General is appointed by the Minister after consultation with the Supervisory Board. - Governance reforms noted: - From 2020 appointees to the DFSA Board will be subject to enhanced scrutiny with new requirements (fitness and integrity) in force from January 2020; a dismissal procedure for a Board member will be introduced (at the Minister’s discretion). ### Key findings on operational independence and resources - Operational independence is undermined in two broad categories: governance and resource. - Resources constrain the DFSA inappropriately despite incremental staffing increases in AML and insurance; risks to the financial system are outpacing staffing. - Funding structure does not isolate the DFSA from potential influence of government (a ministry representative sits on the Board with observer status) or industry. - The DFSA has been required to operate on a “least cost” basis, undermining policy and process development, scope and execution of tasks. - Human resources concerns include high turnover of junior staff and lack of depth at middle management, despite high individual quality. ### Supervisory approach and priorities - The DFSA’s supervisory approach focuses strongly on traditional financial risks: - In banking: emphasis on credit risk. - In insurance: emphasis on market risks and asset-liability management. - Identified gaps and necessary enhancements: - Sharpen supervision of non-financial risks (compliance, governance, conduct, compensation practices, risk culture). - Develop more detailed guidance on risk assessment of individual supervised entities to support supervisory judgement and ensure consistent outcomes—use examples and clear parameters; ensure all relevant risks are captured with appropriate and consistent weightings. - Corporate governance assessments need to complement ‘bottom-up’ analysis with ‘top-down’ assessments that examine Board of Directors (BoD), senior management and broader governance structures. - Risk experts should both proactively and reactively provide advice, analysis and support to supervisors; risk decisions and advice should be centrally recorded. - Prioritize and increasingly invest in DFSA IT/data systems to support supervision’s analytical capabilities and leverage supervisory data to identify trends and emerging risks. ### Anti-money-laundering (AML) and related supervision - Valuable initiatives underway to enhance AML supervision; DFSA must take ownership of outputs from ongoing projects. - Resource limitations risk the DFSA’s ability to meet high political expectations on AML. - Risk areas that provide early insights to AML risks (operational risk, IT risk, compliance) may be squeezed for resources. - In finalizing AML/CFT supervision projects the DFSA must: - take ownership of new models and manuals; - ensure the risk scoring model has an appropriate range of data and supervisory overlay; - establish systematic DFSA coordination on AML. ### Use of powers, corrective action and authorizations - DFSA benefits from a wide and graduated set of powers and is augmenting some through AML legislation. - DFSA must analyze corrective action data to identify patterns and root causes of deficiencies. - In authorization, change of control and fit-and-proper assessments, DFSA should: - communicate rising expectations; - place onus on applicants to demonstrate they fully meet substance, not only superficial terms; - consider new techniques to employ more rigorous tests. ### Selected Main Recommendations (Table 1 highlights) - Independence and Resources - Base the Board appointment process on a Parliamentary process. Lengthen tenure of Directors’ appointment and de-link from the political cycle. Remove the MIBFA representative from the Board. — Responsible: MIBFA — Timing*: Mid Term - State the reasons for the dismissal of a Board Director and Director General clearly in law and publicly disclose in the event a dismissal should ever take place. — Responsible: MIBFA — Timing*: Mid Term - Expand budget envelope for DFSA to recruit and retain quality staff across full range of skills and experience and with a focus on non-financial risks. — Responsible: MIBFA — Timing*: Short term - DFSA to publicly communicate its supervisory capability, based on its resource envelope and published risk appetite statement. — Responsible: DFSA — Timing*: Short term - Broaden use of external expertise in priority areas to supplement risk expertise. — Responsible: DFSA — Timing*: Short term - Regulation and Supervision – Banking and Insurance - Develop more detailed guidance on risk assessments (using examples and clear parameters) to support supervisory judgement and ensure consistent outcomes. — Responsible: DFSA — Timing*: Under 6 months - Formalize cooperation processes to enhance transparency; ensure a more consistent approach to engagement with firms; and mitigate risks associated with staff turnover and key person risk. — Responsible: DFSA — Timing*: Under 6 months - Prioritize and increasingly invest in IT/data systems to support analytical capability. — Responsible: DFSA — Timing*: Short term - Increase horizontal analysis across risks, entities and industries to identify trends and emerging risks. Enhance data analysis on non-financial risks. — Responsible: DFSA — Timing*: Short term - External auditor certification regime must balance standards and availability of professionals for banks and insurers. — Responsible: DFSA — Timing*: Mid term - Exploit database of corrective and remedial actions effectively to ensure that common issues—and root causes—or emerging patterns are identified in firms. — Responsible: DFSA — Timing*: 18 months - Banking Regulation and Supervision - Enhance systematic and prioritized approaches to confirm explicitly the veracity of supervisory data and information received. — Responsible: DFSA — Timing*: Short term - Conduct more frequent in-depth inspections of high-risk firms and use inspections flexibly to respond to risks indicated in offsite work and external events. — Responsible: DFSA — Timing*: Ongoing - Enhance skills —using external experts as needed—to intensify supervision of and give greater priority to non-financial risks (governance, risk culture, IT risk etc). — Responsible: DFSA — Timing*: Short term - Document risk interpretations centrally to enhance consistency and enable horizontal risk analysis. — Responsible: DFSA — Timing*: Under 1 year - Ensure corporate governance assessments include ‘top-down’ assessments; Issue guidelines or an order to impose a requirement for the BoD to assess its own performance as well as the performance of the BoM. — Responsible: DFSA — Timing*: Mid term - In finalizing AML/CFT supervision projects, DFSA must take ownership of new models and manuals; ensure the risk scoring model has an appropriate range of data and supervisory overlay; and establish systematic DFSA coordination on AML. — Responsible: DFSA — Timing*: Short term - Broaden DFSA’s powers in relation to change of control, fit and proper reviews, financial holding companies, non-financial parent companies and related parties. — Responsible: MIBFA/DFSA — Timing*: Mid term - Require banks to factor liquidity and other risks into the internal pricing of their financial products. — Responsible: DFSA — Timing*: Under 1 year - Grant DFSA access to the external audit papers of the banks under its supervision. — Responsible: MIBFA — Timing*: Mid term *Timing labels taken verbatim from the source. _Executive Summary — Denmark FSAP Technical Note (EXECUTIVE SUMMARY)_ ### 11. Conflict of interest standards for Board members will also be amended. At the time of ### 11. Conflict of interest standards for Board members will also be amended. At the time of ### Conflict of interest and cooling-off periods - Current restrictions: members of the Board of Directors and the observer may not be employed in or be members of the board of Directors for financial companies, companies that are part of a group of financial corporations, companies that have qualifying holdings, pursuant to the FBA, in financial companies. - New legislation requirement: the chair and vice-chair may not have worked for a financial company or have been a member of the board for a financial company during the last five years before appointment to the DFSA Supervisory Board. - Cooling-off-periods are being increased to 5 years prior to taking up a Board position. - Comment: The extended cooling off period might unduly restrict the pool of credible candidates for the Board. ### Supervisory Board roles and responsibilities - The Supervisory Board is tasked with organizational and strategic roles as well as making decisions in supervisory matters which have significant and far-reaching consequences. - The Board approves executive orders and guidelines in areas where the DFSA is authorized to issue regulations. - The Board provides technical, organizational and managerial assistance to the management team of the DFSA and approves the annual report of the DFSA. - Tasks of the Supervisory Board are laid out in the FBA, section 345(7), and include: - a. Approval of the organization of the supervisory body; - b. Defining the strategic objectives of the DFSA's supervisory activities and activities pursuant to part 17 and 17a, concerning planning of winding up and impairment and conversion of equity instruments; - c. Approval of the annual report of the DFSA; - d. Deciding on reactions in cases of principle and in cases which have significant consequences; - e. Making decisions in cases of orders pursuant to FBA s. 347b (1), concerning impartial examination of one or more conditions in the financial undertaking; - f. Deciding to hand over cases covered by no. 4 for police investigation; - g. Approving rules and guidelines to be issued by the DFSA; - h. Assisting the DFSA in the handling of cases under FBA chapters 17 and 17a which are not covered by (b). ### Funding and resources - The DFSA is funded through fees charged to the supervised institutions, but subject to budget restrictions imposed by the MIBFA and Ministry of Finance. - Over recent years, funding for the DFSA has increased by more than 17 percent, though most of this is hypothecated to Anti-Money Laundering (AML). - Notably the prominent cases of money laundering have prompted more funding that is targeted for AML activity. - Historical note: The previous FSAP of 2014 commented that supervisory resources were too low and the DFSA has undertaken a range of benchmarking exercises to probe a more acceptable range. ### Assessment of independence and governance issues - Due to the terms and conditions under which it has been established, the DFSA does not meet the international standards of an independent supervisory authority. - The respects in which the DFSA’s operational independence are undermined fall into two broad categories: governance and resource. - Governance issues — appointments and dismissals: - Appointments to the Board are made by the Minister and are of short duration. - The 2014 FSAP recommended an extension to the very short—2 year—Board appointments and to introduce formal vetting process for Board members. - No change has been made to the 2 year appointment period, though formal criteria for fit and proper standards are being put forward in the current legislative process. - Dismissal processes for Board members are being introduced, but are at the discretion of the Minister. - Ministerial ability to change the Board has been ratified, but consistency of tenure is not supported. - Best practice recommendation: Board members’ term of service is disconnected from the political cycle and tenure extended to permit experience and expertise to develop. - Governance issues — responsibilities: - Given that the Board are Ministerial appointees, and include an observer from the MIBFA, care is needed in the handling of operational matters. - The Board is involved in topics of principle in interpreting the parameters of the FBA and how the DFSA may use its powers of action, and it is involved in the operational design of the DFSA. - There is a blurred line between strategic and operational issues; if the Board directs the DFSA not to pursue an action and subsequent events indicate the DFSA should have used its powers, the Board rather than the DFSA should be held accountable. ### Recommendations - The Board appointment process should be moved to a broader parliamentary base and dismissal should be for reasons that are set out in law and publicly disclosed at time of dismissal. - The tenure of appointment needs to be lengthened and disassociated from the political cycle. - The reasons for the dismissal of a Director General should be clearly stated in law and publicly disclosed in the event a dismissal should ever take place. - The cooling off period prior to assuming a Board position should be reviewed at the next opportunity and revert to its previous level. - To signal operational independence, the MIBFA representative should no longer sit on the board, and a regular meeting between the Director General and the MIBFA should replace it. *Source: 1dnkea2020002 - 11. Conflict of interest standards for Board members will also be amended. At the time of; IMF PDF content.* ### Box 1. Denmark: Financial Technology and the DFSA ### Box 1. Denmark: Financial Technology and the DFSA ### Fintech team and initiatives - The DFSA established a dedicated fintech (financial technology) team in 2017 with a government mandate and funding. - The team provides “handheld supervision” acting as a liaison between the licensing team and fintech firms to guide companies unfamiliar with financial and prudential requirements. - The team established a sandbox initiative (FT Lab) where selected companies can test technologies and business models in a secure environment. - To date there has been a limited number of fintechs coming through the DFSA in the banking space and the unit may currently be under-utilized. - Continued awareness raising throughout DFSA staff is identified as needed. ### Resource challenge and institutional funding Findings - Resource burdens for supervisors have been increasing globally; DFSA faces pressure from continued regulatory flows for at least a further 3 to 5 years as EU legislative processes finalize required regulations and directives. - New risks demand evolution of supervisory processes and acquisition of new skills (examples cited: cyber resilience, fintech opportunities, sophisticated threats from criminal activity including money laundering and terrorist financing). - DFSA faces pressure both for numbers of staff and the right suite of skills. - Recruitment and retention of specialist skills (e.g., cyber specialism, actuarial science) is difficult due to thin and expensive markets. - DFSA strategy: position as an excellent first step on a career ladder; risk of high turnover and a treadmill of recruiting and training rather than retaining seasoned staff. - DFSA lacks a full degree of discretion over internal fund allocation; recent increases for AML and establishment of the fintech unit illustrate funding can be hypothecated to particular uses. - DFSA cannot set its annual budget independently and is dependent on the MIBFA and the Ministry of Finance, although funding is levied from the industry. Key statistics (as presented) - Recruitment horizon for EU legislative finalization: at least a further 3 to 5 years. Recommendations (resource-related) - An expanded budget envelope is recommended to: - Enhance DFSA as a career option for specialists and talented mid-career staff. - Expand internal audit and risk management functions for the DFSA itself. - Continue and potentially elevate funding for IT resources to harness analytical potential from DFSA-collected/generated data. - If additional resources cannot be agreed, DFSA should publicly communicate with the MIBFA to ensure DFSA is held accountable but not against unreasonable expectations; clearly articulate what DFSA can deliver within a specific budget envelope. Development and publication of a risk appetite statement by the DFSA would be beneficial. - The DFSA has established an internal audit function; however, it appears under-resourced given its role in embedding a risk management framework and workplan. - Given scarcity and expense of specialist skills, DFSA is advised to supplement risk expertise by making more use of external experts to support work—particularly beneficial in newer risk areas and for targeted deep-dive assessments on shorter timescales. ### Market structure and key statistics Findings and figures - Denmark’s financial system assets stand at assets over 600 percent of GDP. - The banking sector—comprising 76 banks and mortgage credit institutions (MCIs)—accounts for 60 percent of financial sector assets. - The banking sector is dominated by seven domestic systemically important financial institutions (D-SIFIs); the largest is the Danske Bank Group (with assets of about 170 percent of GDP). - Insurance companies and pension funds (ICPFs) are large relative to European peers at 200 percent of GDP. - ATP is the dominant provider of pension savings outside the insurance sector. - The Danish banking sector comprises Commercial banks, Credit Cooperatives and Savings Banks; new banking entities must have a limited liability structure under the Financial Business Act. - As of end-2019, there were 654 commercial banks, credit co-operatives and savings banks in Denmark. - Major groups account for the majority of total lending; sector is among the largest in Europe relative to GDP and among the most concentrated. SIFI designation and thresholds - The Danish SIFI buffer requirement is one to three percent of risk weighted assets, depending on degree of systemic importance, met by common equity tier 1 capital. - As of June 2019, SIFI groups in Denmark: Danske Bank, Nykredit Realkredit, Nordea Kredit Realkreditaktieselskab, Jyske Bank, Sydbank, DLR Kredit and Spar Nord Bank. There are two SIFIs in the Faroe Islands and one in Greenland. - SIFI designation quantitative criteria (if met in two consecutive years): - Balance sheet greater than 6.5 percent of GDP (Greenland: 65 percent and Faroe Islands 13 percent); - Lending greater than 5 percent of total sector lending; - Deposits greater than 3 percent of total sector deposits. - Footnote thresholds for Greenland and Faroe Islands: - Greenland: Balance sheet greater than 65 percent of GDP, lending greater than 50 percent market share and deposits greater than 50 percent. - Faroe Islands: Balance sheet greater than 13 percent, lending greater than 50 percent and deposits greater than 10 percent. Connectivity and performance - Danish banking system is highly connected with the Nordic and, to a lesser extent, the Baltic systems. - Danske Bank geographic exposure breakdown (in percent): Denmark (52), Sweden (15), Norway (11), Finland (9), UK (4), Baltics (1), rest of Europe (7), and other (2). Danske’s Estonian branch was closed in 2019. - Capital and liquidity ratios are above minimum requirements; net interest margins are being squeezed, ROE remains above the weighted EU average published in the EBA Risk Dashboard. ### Institutional safety net and funds Findings and figures - DFSA and the Financial Stability Company (FSC) are designated resolution authorities under EU legislation. - For systemically important institutions, the Minister of Industry, Business and Financial Affairs determines the choice of resolution tools. - The Systemic Risk Council (SRC) established in February 2013 is an advisory body to address systemic risks; membership includes DN (chair), two DFSA representatives, one representative each from MIBFA and Ministry of Finance, and three independent experts. - The Danish Guarantee Fund (Garantiformuen - DGF) provides deposit protection up to EUR 100,000 per depositor under the Deposit Guarantee Directive; DGF is administered by Finansiel Stabilitet (FSC). - At time of mission, DGF managed assets equivalent to 1.25-1.5 percent of the covered deposits in Denmark. If the level falls below 0.8 percent of covered deposits, institutions must provide further top-up funds. - The resolution fund (Afviklingsformuen) is administered by FSC and currently manages 0.4-0.5 percent of the covered deposits in Denmark, with a target of 1 percent. ### Supervisory approach — risk assessment, planning, and techniques Risk assessment and inspection planning Findings - DFSA employs a risk-based approach and prioritizes resources in high risk areas; supervisory cycle for onsite inspections can vary between one and five years. - A 2014 FSAP recommendation to shorten supervision cycle for sound and well-capitalized medium and smaller banks from once every four to six years has led to an ordinary inspection schedule now every four to five years. - For largest, non-systemic banks with a high risk assessment, an ordinary inspection takes place every two years plus an annual bank credit review. For high risk systemic institutions, DFSA would intensify supervision reflecting systemic importance. - Inspection frequency determined by bank size and DFSA risk assessment. Risk assessment begins with a mechanical slotting according to five quantitative financial risks which supervisors can adjust up or down. - DFSA has increased use of “themed inspections” to focus on specific risk areas; themed inspections increased from 9 in 2014 to 74 in 2018. - DFSA’s supervisory focus is strongly on traditional financial risks and credit risk in particular; default response to high risk assessments is an immediate focus on credit via bank credit review every year plus ordinary inspection cycles. - The “supervisory diamond” sets quantitative limits focused on credit risk areas (large exposures, funding, liquidity, commercial property exposure and lending growth). In 2018 a supervisory diamond for MCIs was established. Comments and risks identified - Central focus on credit risk may mean other key risks are not given appropriate scrutiny. - DFSA’s ability to assess and challenge institutions on non-financial risks (governance, conduct, reputational risk, compensation practices, risk culture) is not as evident; non-financial risks are not given significant prominence in individual bank risk assessments. - Risk of inconsistent risk-scoring exists due to lack of detailed guidance on “what good looks like” and weightings for different risks; no formal quality assurance processes in place for risk assessments. - Increase in themed inspections is welcome but additional capacity and flexibility for onsite inspections would enhance oversight; prior recommendation to follow up themed findings with onsite reviews remains valid. Recommendations (supervisory) - Complement strong skills and focus on credit risk with equal rigor and focus on other risk areas; ensure default inspection schedule for high and above average risk assessments is not skewed towards credit risk. - Large entities with high risk assessment should be subject to a more in-depth inspection on a shorter cycle than every two years. - Sharpen supervision of non-financial risks; give non-financial risks more prominence in bank risk assessments and lift DFSA capabilities and resources in these areas. - Develop more detailed guidance on risk assessments to support supervisory judgement and ensure consistent outcomes; document guidance with examples and clear parameters to support quality assurance and training of new supervisors. - With additional budgetary resources, use onsite exams more flexibly to respond to offsite findings and external events indicating heightened risk concern. Supervisory techniques and activity trends Findings - Key supervisory activities include: - Continuous surveillance through off-site review of data; - Themed inspections (sample-based, on- or off-site); - Functional inspections (specific institution and risk, onsite); - Ordinary inspections (onsite, covering all relevant risk areas). COVID-19 required some ordinary inspections to be conducted off-site by videoconference. - For SIFIs, ordinary inspections are not conducted; instead a series of functional inspections on a rolling basis covers all relevant risk areas. - Since 2014: - Themed inspections increased from 9 to 74; - Functional inspections increased from 15 to 27; - Ordinary inspections decreased from 26 to 20. - Continuous surveillance primarily through quarterly data analysis; supervisors receive standardized data packages and peer reviews, quarterly key risk indicators are presented at a standing bank committee involving the executive board. - Ordinary inspections are always conducted on-site with inspection scope varying by institution size; for largest institutions, all areas are covered via functional inspections rather than a single ordinary inspection. - DFSA has documented internal policies and procedures since 2018, including formal processes for planning and executing on-site inspections and off-site activities; long-form reports follow inspections and short-form summaries are published by institution and DFSA. Comments on procedures and attestations - Internal documentation has been significant and helpful, especially for new staff. - DFSA often receives attestations, frameworks, reports and policies from banks; DFSA seeks to verify attestations during onsite inspections but in many instances places reliance on firms’ attestations without further verification due to inspection frequency constraints. Firms may be unaware of failings in practice or may not always deal openly and honestly. *Source: Box 1. Denmark: Financial Technology and the DFSA (excerpts from the provided IMF chapter).* ### 45. Much of the coordination, consultation and cooperation across divisions within the ### 45. Much of the coordination, consultation and cooperation across divisions within the DFSA ### Internal coordination and informal engagement - Finding: Much of the coordination, consultation and cooperation across divisions within the DFSA continues to rely on informal interactions. There is a strong sense of trust among colleagues and the informal ways in which engagement takes place is a strength of the organization. - Risk: The reliance on informal interactions creates risks when these interactions do not take place (eg: during busy periods; when staff change; or when colleagues are not sure when and who they should contact). - Action underway: The DFSA explained that it was working on a policy to enhance internal coordination, as well as an update of the role of expertise centers. This work began in the summer/autumn 2019, with a planned completion date of spring 2020. The policy will address organization and coordination of supervision by divisions working on the same institution. - Recommendation bullets: - The DFSA’s supervisory oversight may benefit from a greater focus on checking banks representations and following up on how frameworks and policies apply in practice with more periodic ‘end-to-end’ reviews of selected processes. Supervisors must be able to trust their entities to a certain extent, but prudence suggests a ‘trust but verify’ approach may be most fitting. - As the DFSA grows in size it is becoming more important that consideration be given to formalizing some of the ways in which colleagues engage with each other. The introduction of formal ‘liaison officers’ between the Economic Secretariat and other parts of the DFSA is welcome but there is scope to further formalize interactions. The work on developing the internal coordination and organization policy is therefore extremely important. This should not impede the strong collegiate culture of the organization, rather it should help to reinforce those bonds. At the same time, more formalized touchpoints should enhance transparency; ensure a more consistent approach to engagement; and mitigate the risks associated with staff turnover and key person risk. ### Liquidity in internal pricing - Finding: The DFSA does not explicitly require banks to take into account liquidity impacts in their reviews of internal pricing. - Background: The 2014 FSAP recommended that as part of assessing whether banks appropriately account for risks, banks should be required to ensure that liquidity and other risks are factored into the internal pricing of financial products. This recommendation has not been addressed and still stands. ### Risk expertise (centers of excellence) - Finding: The DFSA’s specialist risk expertise for banking supervision is dispersed across the organization in numerous ‘centers of excellence.’ There are different types of centers of excellence some with more supervisory focus and some with more regulatory focus. Some risk experts sit in dedicated risk teams, others operate from within supervision teams and may be fully or only partly dedicated to providing risk expertise. - Statistic: There are more than 40 centers of expertise although in some cases the same risk is dealt with in more than one center of excellence. - Practice: Supervisors may seek advice from the risk experts in relation to their entities and in some cases the risk experts will accompany the supervisors on inspections to focus on specific risks. - Comment: Risk decisions, advice and interpretations are not consistently documented in a centralized way. Whilst advice on a particular entity will be noted on the individual bank files, there is no horizontal capture of the risk advice given. Where a risk is dealt with in more than one center of excellence there are no formalized mechanisms to ensure consistency between the two. This can lead to inconsistent outcomes, silo-ed approaches and duplication of effort. - Additional risks: - Risk advice is typically provided at the request of supervisors; in at least some centers the risk expert only provides advice when sought by the supervisor, creating the risk that supervisors may not always recognize or flag the need for additional expertise. - Risk advice provided by a risk expert does not have to be followed by the supervisor; while the DFSA has a strong expectation that supervisors will identify risks and follow advice when sought there is no mitigation in place should this not occur. - Recommendations: - The DFSA should document the risk interpretations and advice given in a centralized way to enhance consistency and allow for the development of horizontal analysis of the risk. While the DFSA places importance on each center of excellence liaising with other relevant centers of excellence to ensure consistency this appears to be an informal expectation which does not consistently occur. More formalized expectations of collaboration and improved documentation of risk decisions would improve consistency in this area. Improved documentation would also allow for horizontal analysis of the risks including identification of risk concentrations and emerging areas of concern. - Risk centers of excellence should both proactively and reactively provide advice, analysis and support to supervisors. Ensuring that risk experts horizontally analyze data allows for the identification of risk trends and concentrations that supervisors may not be able to identify at an individual entity level. Risk experts should also be obliged to flag to management where their advice has not been taken so that this can be documented and followed up if necessary. ### Supervisory reporting and data analytics - Finding: The DFSA receives a significant amount of data from its banks as part of ongoing supervision. The regular data comes from submissions based on common European templates developed by the European Banking Authority (EBA); and reporting based on national templates designed by the DFSA for supervisory purposes. - Coverage: The DFSA considers that they receive all the data needed for off-site surveillance and risk based supervision, such as financial statements, capital adequacy, liquidity positions and funding, large exposures, asset quality, market risk, stress testing outcome etc. - Tools: There is a user-friendly interface for supervisors to see the data from their supervised entities and to perform some analyses and peer comparisons. Charts and excerpts from this system are included as part of the individual risk assessments. - Comment: It is critical that all supervisors, including the DFSA keep pace with advancements in data, analytics and technology so they can leverage supervisory data as effectively as possible. Strong data analytical capabilities can be a powerful tool for supervisors to support them in their work. In addition to the data submitted by supervisors the DFSA also creates data through its own supervision which can also provide useful insights. - Recommendations: - The DFSA should prioritize and increasingly invest in its internal IT/data systems to support supervision’s analytical capabilities. In this regard the recent establishment of an Analytical Center of Excellence (ACE) and a Data Operations Team (DOT) are welcome developments. Whilst there has been work to enhance the tools available to supervisors to support their work, continuous investment in technology will allow the DFSA to keep pace with the data capabilities of its supervised entities. Although some horizontal analysis takes place, increasing the extent to which it is undertaken across risks, entities and industries may better allow supervisors to identify trends and emerging risks. Enhancing data analysis on non-financial risks will also support work in this area. - Data analytics should focus not just on entity data collected but also on the data created by the DFSA itself. In addition to analyzing entity data the DFSA should leverage its own supervisory work to identify trends and emerging risks. For example a comprehensive analysis of orders given within and across industries could provide useful insights and trends and indeed is something that anecdotally we understand industry sees value in and already does to some extent. As mentioned earlier, a central recording of risk interpretations and advice would reduce the risk of a siloed approach to risk and reduce inconsistency in approach. Better capture across the DFSA of internal risk data could also facilitate a more complete picture of the risk profile of a bank to emerge. ### Supervision of specific risks — Corporate governance - Institutional framework: - Denmark has a two tier management system. The Board of Directors (BoD) takes part in the overall and strategic management and supervises the senior management, known as the Board of Management (BoM). - Corporate governance requirements for banks are primarily set out in provisions in the FBA; the DFSA’s Executive Order on Management and Control of Banks (EO-MC); and for companies listed on the stock exchange, the ‘Recommendations on Corporate Governance.’ - Division of responsibilities: The division of responsibilities between the BoD and the BoM is set out in the DFSA’s EO-MC. The BoD must ensure effective control over the bank’s entire business, adequate risk management and internal control procedures, and decide overall strategic objectives including risk appetite. The BoM must ensure that the bank complies with policies agreed by the BoD. - Fitness and propriety: Members of the BoD and BoM as well as key function holders are required to meet certain standards with regard to fitness and propriety. In accordance with Section 64 of the FBA, the DFSA must assess whether members of the BoD and BoM meet fit and proper standards. Banks must also identify staff with responsibility for a key function eg: head of compliance, head of internal audit; and these ‘key function holders’ must also be assessed by the DFSA for fitness and propriety. - Committees: Denmark has implemented the European Directives including provisions on requirements for nomination, risk, audit and remuneration committees. - Compensation principles: The FBA establishes compensation principles for board members and material risk takers. Section 77(a) of the FBA establishes a number of compensation principles designed to ensure an appropriate compensation policy that supports the bank’s long run safety and soundness and discourages excessive risk taking. These include: - maximum levels of variable compensations to base salary (50 percent), - minimum proportions of equity to overall variable compensation (50 percent); - and the use of deferred payments (40 - 60 percent over three year periods, depending on the amount). - Business culture requirement: New legislation requires the adoption of a written policy that ensures and promotes a good, healthy business-culture within the company which the BoM must ensure is implemented and complied with. According to FBA s.70a, a bank’s policy should establish the overall framework to facilitate a healthy business culture at all levels in the organization and should support a business environment that encourages open communication and stimulates a sound, critical attitude among employees towards behaviors linked in particular to financial misreporting, misconduct, economic and financial crime (including fraud, money laundering and anti-trust practices etc.). - DFSA practice and capacity: - The DFSA’s assessment of a bank’s compliance with the EO-MC is considered to be a main element of on and off-site inspections. As part of these inspections, the DFSA reviews the rules of procedure of the BoD; minutes of the meetings of the BoD; and the BoD’s self-assessment required skills and knowledge. The DFSA also regularly meets with the Chairman of the BoD; the BoD; and key function holders. The frequency of the reviews/inspections and meetings are planned on the basis of the DFSA’s risk assessment both of the institution and more broadly. - The DFSA has a team that specializes in corporate governance and remuneration. The six-member team’s key focus areas are fit and proper assessments; remuneration and ongoing policy and legislative work. For the most part however, supervisors take the lead in reviewing and assessing corporate governance within banks. Although remuneration data is reviewed by the specialist team, more in-depth analysis such as the drivers and incentives remuneration frameworks create within an organization does not appear to be an area of focus. - The DFSA’s assessments of corporate governance in banks tend to focus more ‘bottom-up’ than ‘top-down.’ Apart from ‘fit and proper’ assessments, the DFSA focuses mainly on corporate governance as it relates to specific risk areas eg: governance of the credit risk area, rather than a broader, more holistic assessment. Robust ‘top-down’ discussions on governance matters are not as common. - The DFSA does not appear to have the full skillset to address the new business culture requirements. The new amendments to the FBA related to business culture will require upskilling of staff and/or new resources to ensure that the DFSA can satisfy itself that banks are meeting the requirements. - Recommendations: - The DFSA should issue guidance, or an executive order requiring the BoD to assess its own performance. This would be consistent with the Basel Committee’s corporate governance principles for banks (the Basel CG Principles). Principle 3 of the Basel CG Principles states that to support its own performance, the board should carry out regular assessments – alone or with the assistance of external experts – of the board as a whole, its committees and individual board members. This should include an assessment of “the ongoing suitability of each board member periodically (at least annually), also taking into account his or her performance on the board.” As noted in paragraph 157 of the Basel CG Principles, “the board and senior management are primarily responsible for the governance of the bank, and supervisors should assess their performance in this regard.” While discussion on board performance may happen as part of the supervision of some Danish banks, it was not clear that this was happening as a matter of course and in a consistent way across institutions. - It is recommended that the DFSA complement the ‘bottom up’ approach to corporate governance by also consistently reviewing from ‘top-down.’ Corporate governance is the set of relationships between a company’s management, its board, its shareholders and other stakeholders and as such, it is important to assess it holistically. The board should set the ‘tone at the top’ and supervisors should be willing and able to engage and probe the BoD and BoM on their performance and oversight of the bank. - The DFSA should upskill in the new areas of focus set out in the FBA, in particular in relation to business culture. Ensuring that entities meet these requirements will require new skills across the DFSA, which should be acquired and developed to ensure an appropriate supervisory oversight of the new requirements. ### Internal controls and external audit — Financial reporting, internal and external audit - Auditor certification requirement: External auditors that sign audit reports for banks under DFSA’s supervision need to be certified by the DFSA. Certified auditors need to evidence 750 hours of audit work from at least three different banks within the previous five years, as well as meeting an ongoing education requirement. - Statistic: There are currently 39 approved individuals; of those 39, 29 are currently signing audit reports for banks; representing four audit firms in total. - Access to working papers: The DFSA does not have access to the working papers of banks’ external auditors. The 2014 FSAP recommended that the DFSA should seek to have such access but this has not occurred. The Danish Business Authority is the competent authority for the oversight of auditors and the DFSA does not wish to interfere with this competence by also seeking access to papers. - Cooperation: Notwithstanding the lack of access, the DFSA has intensified its cooperation with the Danish Business Authority in recent years. This cooperation has included a legal analysis of the extent to which information may be exchanged on external auditors between the DFSA and the Danish Business Authority. The recommendation on access to auditors’ working papers remains valid. *Content based on the supplied IMF PDF extract.* ### 64. Audit and risk management reports of SIFIs are automatically received by the DFSA ### 1dnkea2020002 - 64. Audit and risk management reports of SIFIs are automatically received by the DFSA ### Audit and risk management reports flow - Audit and risk management reports of SIFIs are automatically received by the DFSA when they are completed. - The 2014 FSAP recommended these reports should be received on a flow basis as this was not happening at that time. - Reports from non-SIFIs are not received on a flow basis. ### Fair value verification and internal control requirements - There is no explicit requirement for fair value estimates to be subject to independent verification and validation. - The 2014 FSAP recommended such a requirement; this has not been implemented. - The DFSA notes: - Valuations for significant assets will be audited by the external auditors as part of their audit of the financial statements. - If the bank has an internal audit function, the internal audit will audit all significant and risky processes. - Banks are not required to incorporate provisions related to dual control (four eyes principle) and provisions on the protection of assets. - The 2014 FSAP recommended that banks be obliged within their internal control frameworks to include provisions related to dual control and protection/safeguarding of physical and automation assets, and that the DFSA incorporate this into a revision of the EO-MC. ### DFSA engagement with external auditors and auditor certification - As part of ordinary inspections the DFSA meets with external auditors to: - Get the auditor’s view and assessment of the risks in the company; the management; the company’s current status/condition; and an assessment of the company’s capital. - Assess the external auditors’ quality and compliance with the rules. - The numbers of certified auditors has been declining since the auditor certification regime was introduced in 2014. - Industry feedback: - The specific combination of qualifying requirements does not typically align with how audit firms organize their resources. - Auditors taking career breaks or seeking a more diverse range of audit clients may find challenges meeting requirements. - The DFSA has slightly relaxed the requirements in response, but they remain considered challenging by industry. - Stakeholder feedback indicates auditor meetings could be more effective; meetings have often been considered very one-way with information flow expected from the auditor only. - The EBA Guidelines on communication between competent authorities and auditors confirm communication should be open and constructive and that competent authorities should share information relevant to the statutory audit. Any information shared is subject to the confidentiality requirements in the CRD (Section II of Chapter 1 in Title VII of Directive 2013/36/EU). ### Recommendations (audit-related) - Consistent with the 2014 FSAP recommendation, the DFSA should have access to the external audit papers of the banks under its supervision. - The DFSA should ensure its external auditor certification regime is appropriately balanced to ensure standards are maintained while preserving competition, diversity and choice for banks. - In the absence of revision, the current certification requirements may over time create a precarious shortage of qualified professionals. - Banks currently have a choice of four audit firms which, with mandatory rotation, may be considered a narrow choice. - The DFSA should ensure bilateral meetings with external auditors are open and constructive, with two-way information exchange and sharing of information relevant to auditors’ function. - The DFSA should ensure an explicit reference to the need for dual control of assets in the EO so banks are clearly required to include provisions related to dual control (four eyes principle) and protection of assets. - Audit and risk management reports of non-SIFIs should automatically be received by the DFSA when completed. ### AML/CFT: scope, legal changes, and institutional arrangements - The DFSA is responsible for AML/CFT supervision of all financial companies. - Approximately 1,800 financial companies are currently subject to DFSA AML Division supervision, including banks, money remitters, insurance brokers, and pension funds. - DFSA AML/CFT powers derive from the Act on Measures to Prevent Money Laundering and Financing of Terrorism (Section 34(1), Act No. 442 of 11 May 2007) and were expanded via Act No. 651 (2017) and Act No. 1563 (2019) to transpose the EU’s 4th and 5th AML Directives. - A law effective January 2020 (Act No. 1563 (2019)): - Heightened standards for firms and broadened DFSA powers of remedial action. - Strengthened whistleblower protection across the financial sector. - Requires banks, e-banks and payment institutions to have written policies ensuring and promoting a healthy corporate culture. - Expanded DFSA powers to appoint/place monitors within an FI, ban an FI’s acceptance of new customers until breaches are rectified, and issue administrative fines (“fixed-penalty”) for AML/CFT violations. ### Cross-border and domestic coordination - DFSA responsibilities cover financial firms incorporated in Denmark and foreign branches (EU and non-EU) established in Denmark. - AML/CFT supervision operates closest to the physical entity; parent supervisors remain responsible for group supervision. - Supervisory colleges are active for cross-border banks and a Nordic-Baltic working group exists separate from colleges. - Domestic coordinating bodies: - Danish Money Laundering Forum (MLF) established by Act No. 651 (2017) (Section 74) supports authority collaboration. - Quarterly MLF participation chaired by the DFSA includes the FIU, Ministry of Taxation, Ministry of Justice, Ministry of Industry, Business and Financial Affairs, Ministry of Foreign Affairs, Gambling Association, The Danish Bar and Law Society, Tax Authorities, and Danish Business Authority. - Money Laundering Forum Plus (MLF+) facilitates private stakeholders’ collaboration and two-way communication with authorities. ### AML/CFT resourcing, tools, and supervisory approach - DFSA staffing for AML/CFT: - At the 2017 FATF Mutual Evaluation, the DFSA had only 3 to 4 persons working on AML/CFT. - As of January 2020, there are 20 staff working on AML/CFT, measured in full time equivalents. - The team has backgrounds in tax, law, international banking, the public prosecution service, and the FIU. - The DFSA conducted a major development project with external consultants (PA Consulting), delivering: - An inspection manual; - A risk assessment scoring model; - A revised risk-based approach to organize AML/CFT supervision. - Implementation guidance: - The DFSA should ensure it “owns” the model and manual it puts into practice and makes ongoing updates as necessary. - Ensure maximum, systematic internal coordination so all information relevant for AML/CFT oversight is captured, including information from prudential supervision on governance, risk culture, risk management and systems and controls. ### AML/CFT supervisory priorities and internal coordination - The DFSA should intensify on-site inspections of higher-risk FIs while expanding onsite examinations to a greater number of banks. - On-site inspections are a main pillar in AML supervision and critical supervisory issues cannot be fully ascertained through off-site processes. - An “inspection” might take 300 hours, for example, less than 20 of which might be spent onsite. - If the DFSA is unable to inspect substantially more than 2 percent of the total population of companies in a given year, it would remain locked into a 20-year or longer cycle to review the entire system, even allowing for annual targeted visits to DSIFIs. - DFSA has scope to improve internal communication and coordination: - Plans to enhance AML/CFT information sharing within the DFSA should be well designed and put into effect in the near future. - Attention needed to governance, control and compliance and coordination between the AML division and supervisory divisions. - Example: DFSA could check that no bank has a current Anti Money Laundering Officer (AMLO) gap. ### Operational risk and IT risk supervision - Operational risk: - At the last FSAP, DFSA was rated materially non-compliant in the BCP assessment of supervision of operational risk; reforms since then include regulatory and supervisory developments. - Regulatory enhancements: more detailed requirements on banks’ operational risk policy, guidelines and processes in the executive order of management and control of banks (Annex 3); notification requirement on significant operational risk events. - Supervisory changes: procedures for off-site monitoring of trends in operational risks and changes in banks’ individual risk profiles; additional reporting requirements introduced in 2016 for medium and large banks based on the basic indicator approach, similar to standardized approach reporting. - DFSA obtains annual data on number and scale of loss events and loss event registration thresholds for all loss events over the previous year. - For SIFIs, inspection is carried out by the supervisory division responsible for SIFIs; policy expertise for operational risk is embedded in a different banking division. - Operational risk assessments for SIFIs occur in functional or SIFI-wide thematic inspections; operational risk is discussed at least annually with senior management and the DFSA meets with the head of operational risk in the SIFIs once or twice a year. - No Danish bank has ever applied for approval to use Advanced Modelling Approaches (AMA) for operational risk capital adequacy. - Recommendation: continue momentum to ensure SIFIs’ risk practices are fully understood and that SIFI divisions align with policy center on operational risk. - IT risk: - DFSA Board approved a plan in early 2019 to strengthen IT supervision, including more rigorous methodology for risk assessment and classification, strengthening methodology for IT supervision in SIFIs, and developing a methodology and framework for IT supervision for non-SIFIs. - The IT risk team’s resources appear lean given the scale of risks and number of entities to supervise. - Recommendation: consider leveraging external expertise to support onsite IT supervision, particularly for non-SIFI banks. ### Liquidity and covered bonds - Liquidity assessment: - With the exception of Danske, liquidity is assessed at both solo and group level in the Danish banking system. - For Danske (a conglomerate: bank, pension and mortgage credit institution), DFSA assesses liquidity and funding risks at a “wider group” level. - Since the last FSAP, the Liquidity Coverage Ratio has come into force and banks are required to meet a range of standards and guidelines (see Appendix 2 for metrics). - DFSA structure and thematic work: - DFSA has a dedicated division responsible for liquidity supervision of SIFIs and serving as a center of policy excellence for other banks: International Market Contact, Liquidity and Capital (ILKA). - ILKA is responsible for policy and onsite inspections of SIFIs for liquidity and capital. - Thematic inspections by ILKA have included assets used in the liquidity buffer, structure and assumptions of stress tests and run off rates. - Current focus includes categorization of inflows; potential future topics include stress testing within the smaller bank sector where contingency plan options are limited. *Source: 1dnkea2020002 - 64. Audit and risk management reports of SIFIs are automatically received by the DFSA* ### 85. The DFSA seeks to benchmarks credit institutions against peer institutions, but a ### Use of Supervisory Powers in a Changing Environment ### Contingency Planning and Liquidity (Covered Bonds) - The DFSA seeks to benchmark credit institutions against peer institutions, but a systemic overview may be missing: the DFSA requires banks to prepare contingency plans which are assessed by the supervisors responsible for the entity, but the DFSA has not prepared any analysis considering scenarios where sectors (or all) of the banking system would need to utilize their contingency plans at the same time. - Risk: individually planned strategies may not be achievable if multiple institutions attempt the same actions simultaneously, creating additional pressures. - Covered bonds feature: - The Danish market for covered bonds is one of the largest in the world and plays a key role in Danish funding markets. - Based on EBA monitoring, covered bonds comprised nearly half (48 percent) of the total liquidity buffer at end-2018. - Finland is the EU country with the next highest composition of covered bonds at 26 percent. - Under EU regulation, eligible covered bonds can meet up to a limit of 70 percent of the HQLA. - In Basel, covered bonds are deemed HQLA Level 2B only and Level 1 HQLA are reserved primarily for central bank reserves and sovereign exposures. - If EU covered bonds deteriorate, they may lose eligibility under the LCR and must be de-recognized as a liquid asset within 30 days, leading to potential liquidity pressure that could transmit systemwide given the interconnected Danish markets. - Recommendation: - The DFSA should execute a system wide analysis of contingency plans to ensure feasibility in the case of a systemwide, rather than idiosyncratic, liquidity event — particularly relevant given the comparatively high reliance on covered bonds to meet the LCR. ### Corrective Actions and Enforcement - Activity and market signal: - In just under a five year period, the DFSA recorded over 2,000 supervisory measures taken against banks and mortgage credit institutions. - The very great majority, over 80 percent, of these actions were Orders. - Orders are public and taken seriously by management and boards; banks monitor Orders issued to peers. - Supervision of remediation: - After an Order, a bank must complete remediation by a given date and often clears the Order by submitting documentation (revised policy, process, or explanation). - Risk: reliance on submitted documentation can lead to acceptance of incomplete or inaccurate information; while conscious deception would lead to severe escalation, there is a tradition of taking information on faith. - Recommendation: DFSA should raise the bar on when it is legitimate to rely on information without independent scrutiny and increase systematic scrutiny, challenge and verification when receiving information from firms. - Use of corrective database: - The DFSA keeps a central log of corrective actions, but it is not yet readily searchable to identify patterns within or across peer groups or sub-sectors. - The DFSA plans to optimize the database to identify lessons embedded in the pattern, frequency, severity and target of Orders. - Recommendation: exploit the database effectively to ensure common issues or emerging patterns are identified; review the database to ensure root causes are not missed and effort is not focused only on symptoms. ### Licensing and Change of Control - Licensing framework and recent activity: - The DFSA is the competent authority to issue a banking authorization following a decision of the Board (FBA, section 14). - EUR 5 million is the threshold for absolute capital a credit institution must hold, in the form of common equity tier 1. - Over the last five years the DFSA has granted four licenses and withdrawn thirteen. - Withdrawals have generally been due to merger/takeover, voluntary surrender due to consolidation, or in a few cases financial difficulties; one license revoked after the institution was declared likely to fail for violations of regulatory requirements. - Process and recommended enhancements: - The DFSA is scheduling an update to its licensing manual; recommendation to require more detailed recording in the formal recommendation note to the Director General to ensure all key aspects of an application are considered (e.g., planned future funding strategies, planned reliance on deposits, future access to capital, organization of resolution, quality of key persons, governance and controls). - Suggested practice: conduct a final onsite inspection to confirm systems, controls and key persons are in place before operations commence. - DFSA should be explicit that the burden of proof rests on the applicant to demonstrate conditions are satisfied before authorization or approvals are granted. - Change of control and powers: - The FSAP repeats a previous recommendation that the DFSA be granted expanded powers in relation to significant (qualifying) ownership to reverse a change of control that had not been assessed and approved when required. - Currently, DFSA can revoke voting rights associated with shares if it has not approved a qualifying holding (FBA Section 62); this power has been exercised in practice. - Recommendation: grant ability to reverse a change of control where approval was required but not obtained; amend FBA to require banks to notify DFSA of material information that may negatively affect the suitability of a major shareholder or controlling party. ### Fit and Proper Assessments - Current practice and market impact: - DFSA has revised fit and proper assessments and its refusal to approve a senior candidate for a CEO position sent a strong market signal. - DFSA undertakes fit and proper assessments not only for new authorizations or change of control, but also when an institution introduces new key persons. - Limitations and recommendation: - DFSA does not have authority to conduct fit and proper reviews on an ongoing basis of owners and senior management of non-financial parent companies. - Recommendation: expand DFSA’s scope to include ongoing fit and proper reviews of owners and senior management of non-financial parent companies due to evolving ownership in the banking sector. ### Related Parties and Scope of Consolidation - Definitions and forthcoming changes: - Identifying related parties and ultimate beneficial owners is important for supervision and AML/CFT; amendments to Danish rules on beneficial owners will enter into force in January 2020. - Two sections of the FBA govern related party issues: individuals (sections 78, 80 and 313b) and Intra-Group Transactions/Exposures (section 181-182). - Gaps and recommended widenings: - Recommendations to broaden the definition of related party (in laws or in DFSA Guidance) to ensure transactions with related parties include: - Key employees in small and medium sized banks (not systemic important banks); - Persons related by marriage etc. to members of the board of directors; - Persons with a direct/indirect interest in the institution below 20 percent; - Transactions and services, not just transactions that result in on or off-balance sheet exposures, that are undertaken for an institution by a related party. - DFSA currently does not apply prudential rules more generally to financial holding companies and lacks authority to conduct ongoing fit and proper reviews of owners and senior management of non-financial parent companies. - Recommendation: DFSA should have authority to apply prudential rules to financial holding companies and to conduct ongoing fit and proper reviews of owners and senior management of non-financial parent companies. ### Consolidated Recommendations (selected) - The DFSA should execute a system wide analysis of contingency plans to ensure feasibility in a systemwide liquidity event. - The DFSA must become more systematic in explicitly confirming the veracity of information received in the course of its supervisory work. - The DFSA must exploit its database of corrective and remedial actions effectively to ensure common issues or emerging patterns are identified. - The DFSA must review its database of corrective and remedial actions to ensure root causes of issues are not being missed and time is not being spent only on addressing issues that are symptoms. - The DFSA should be granted the ability to reverse a change of control where its approval was required but was not obtained. - The DFSA must be granted the authority, amending the FBA as needed, to broaden the definition of related party to include: - Key employees in small and medium sized banks (not systemic important banks); - Persons related by marriage etc. to members of the board of directors; - Persons with a direct/indirect interest in the institution below 20 percent; - Transactions and services, not just transactions that result in on or off-balance sheet exposures, that are undertaken for an institution by a related party. - The DFSA should have the authority to apply prudential rules more generally to financial holding companies. - The DFSA should have the authority to conduct fit and proper reviews on an ongoing basis of owners and senior management of non-financial parent companies. *International Monetary Fund — Denmark Financial Sector Assessment (selected sections).* ### Appendix I. DFSA Powers of Corrective and Remedial Actions ### Appendix I. DFSA Powers of Corrective and Remedial Actions ### Legal and operational basis - The DFSA’s powers are based on the FBA which provide the authority with a graduated suite of corrective actions and disciplinary measures culminating in early intervention measures or revocation. - General legal basis: FBA Section 344(1), Anti-Money Laundering Act Section 47(1), and specific provisions to issue orders (e.g., FBA Section 350). - Executive Order implementation: The power to issue fixed penalty notices is implemented by Executive Order no. 186 as of March 8th, 2011. ### Corrective instruments and regulatory actions - Service information - Feedback to a bank in relation to deficiencies that do not pose a risk to the bank’s business. - Risk information - Directs a bank’s attention towards increases in risk or specific unsustainable elements in the bank’s business model. - Not applied in cases of breach of law or regulation. - Can be issued to several banks simultaneously for themes identified in horizontal, thematic reviews. - Orders and prompt enhancements - Imposed where there has been a breach of law or regulation. - Orders to make prompt enhancements apply to insignificant breaches of law, such as disregard of formalities. - An order constitutes a decision, must articulate thorough reasoning and include guidelines for appeal. - General legal basis includes broad supervisory authority and specific provisions (e.g., FBA Section 350). - Reprimands - Applied retrospectively where there has been a breach that has been rectified by the bank. - Publicly disclosed. - Only applied if there is an insufficient basis to report the breach of law to the police. - Penalty fines - DFSA may apply daily fines through FBA, section 374, or the Anti-Money Laundering Act, section 80(1). - Fines may be on a daily or weekly basis. - Can be imposed upon the board of directors, board of management, external auditor, chief internal auditor, responsible actuary, liquidator, general agent, branch manager or board of representatives of a financial undertaking. - Fixed penalty notices - Authority under FBA, section 373a to issue fixed penalty notices without a court ruling provided that the bank pleads guilty and agrees to pay the fine. - Fixed penalty notices are not necessarily final and can be subject to the court’s further consideration and ruling. - Police reports - DFSA can report an individual or a bank to the police (The State Prosecutor for Serious Economic and International Crime) for more severe breaches of law. - A police report is filed where there is sufficient legal and substantial grounds for further criminal prosecution. - Filing requires approval of the DFSA’s Supervisory Board (FBA Section 345(7)). - Filing is publicly disclosed and can be given simultaneously with an order to stop the breaches of law. - Example cited: the September 2019 filing in respect of Danske Bank due to misleading information provided to its customers. - Revocation/withdrawal of license - Subject to the approval of the Supervisory Board, DFSA can withdraw authorization to exercise banking operations (FBA sections 223-225, section 350 and 351). - Examples of grounds for revocation: - For serious or repeated breaches of law including the Danish Financial legislation and EU law - Failure to continue to meet authorization criteria and requirements - Failure to meet capital requirements - If the bank is failing or likely to fail ### Early warning and early intervention: Supervisory Diamond and related powers - Supervisory Diamond - Contains a number of criteria that are conservatively calibrated; breach of these limits gives DFSA the power to act. - Acts as a form of early warning. - Orders when bank still meets minimum requirements - DFSA may order management to prepare an account of the financial circumstances and future prospects of the bank (FBA section 349 (1)). - Orders require signature by Board of Directors, Board of Management, external auditor and chief internal auditor. - DFSA can issue orders for remedial measures to be completed within a specified time period where depositors’ interests are at risk or there is significant risk of deterioration (FBA section 350 (1) and (2)). - If measures are not met within the time limit the DFSA can revoke the authorization. ### Enforcement based on governance, risk management, and controls - Supervisory judgment triggers enforcement where risk governance and controls are inadequate or bank engages in unsafe or unsound practices. - Boards of Directors failing to meet FBA requirements to establish good governance, risk management policies, processes and control systems (FBA Section 70(1) and (2)) are liable to fines (FBA section 373 (2)). ### Powers regarding management, directors, and shareholders - Removal or compulsion to resign - DFSA may compel the bank to remove a senior manager if the senior manager is no longer fit and proper (FBA section 351). - DFSA can ask a board member to quit if the member no longer fulfills fit & proper requirements. - DFSA may order one or more members of the BoD or the BoM to resign if the bank's financial situation deteriorates substantially or if there are serious breaches of financial legislation (FBA section 243b). - Withdrawal of license linked to non-compliance with removal orders - DFSA can withdraw the license of the bank if the bank does not remove the member of management or if a member of BoD fails to comply with an order before expiry of the time limit that is set. - Controlling shareholders - DFSA has powers (FBA section 62(1) and (2)) to order a bank or holding company to follow specific guidelines and withdraw voting rights associated with the equity investment if the owner fails to meet the fit & proper requirements (FBA section 61a (1)) or fails to submit a prior application for approval before acquisition of the equity. ### Organizational and activity restrictions - Organizational structure and corporate management - DFSA can order a bank to change its organizational structure if it does not have effective forms of corporate management, including a clear organizational structure (FBA section 71(1)). - Separation of subsidiaries - DFSA has powers (FBA section 179) to order a parent to separate subsidiaries into a subgroup if the company structure prevents the parent company from meeting solvency standards, if a member of the Board of Directors or Board of Management of the parent company is not fit and proper, or if the company structure makes it difficult for DFSA to carry out supervision. - Activity restrictions and changes as part of early intervention - DFSA has powers to amend a bank’s organization in the context of early intervention (FBA section 243a). - DFSA has power (FBA section 350(1)) to restrict a bank’s activities. ### Early intervention powers in distress or emerging distress (FBA section 243a) - DFSA may require the bank to: - Activate its recovery plan, or require an update of the recovery plan (required under FBA sections 71a and 71b). - Prepare and submit an action plan to the DFSA. - Convene a general meeting of its shareholders. - Require a member(s) of the board of directors or management to resign their position. - Prepare and submit a plan for negotiations regarding restructuring the undertaking’s debt. - Change its business strategy. - Change its legal or operational structure. - Contact potential buyers in order to prepare for the winding up of the undertaking. --- ### Appendix II. Summary of Quantitative Liquidity Requirements in Denmark ### Relationship to EU/Basel requirements and Danish supplements - EU/Basel metrics transposed: Liquidity Coverage Ratio (LCR) and Net Stable Funding Ratio (NSFR). - LCR is now fully in force. - NSFR will apply from June 2021. - Expected impact of the NSFR: not expected to be significant as most Danish banks have large deposit surpluses. - Danish mortgage credit institutions are also expected to comply with the liquidity requirements. - Additional Danish liquidity tools are embedded in the Supervisory Diamond: a funding ratio benchmark and a (new) liquidity indicator. ### Danish liquidity metrics - Funding ratio - Indicates the ratio between lending – funding need – and the stable funding in the form of working capital subtracted bonds with a residual maturity of less than one year. - The value should be below 1. - Liquidity indicator (liquidity requirement ratio) - As of June 2018, a new liquidity indicator came into force for all Danish banks. - Banks are expected to hold a sufficient liquidity buffer to cover a three months liquidity stress scenario based on the liquidity stress assumptions from the LCR. - In the first month of the stress scenario the assumed stressed inflows and outflows from the LCR are applied and, to reduce complexity, only the main outflow and inflow elements from LCR are applied, such as maturing issuances and term deposits. - The liquidity stress scenario shall be covered by a liquidity buffer as defined in the LCR, but with two modifications: - 1) the cap on asset classes does not apply; and - 2) the definition of liquid assets is extended and includes own issued covered bonds and covered bonds with issue size smaller than EUR 250m. - Modifications account for the very large, liquid and high quality covered bond market in Denmark and simplify the calculation. - The value must be above 100 percent. ### Risk horizon mapping - Short-term liquidity risks - Managed through regulation in LCR as well as the liquidity indicator in the supervisory diamond (liquidity requirement ratio). - Medium-term liquidity risks - Managed through the liquidity indicator in the supervisory diamond. - Long-term liquidity risks - Currently managed through the funding ratio in the supervisory diamond and will also be managed through the NSFR when implemented in 2021. *Source: Appendix I and Appendix II from the provided IMF content unit.* --- _Source: https://www.imf.org/-/media/files/publications/cr/2020/english/1dnkea2020002.pdf_