## _cr07118 ## Source details **Canonical URL:** [_cr07118](https://www.imf.org/-/media/websites/imf/imported-full-text-pdf/external/pubs/ft/scr/2007/_cr07118.pdf) ## Other formats - [Markdown version](/-/media/websites/imf/imported-full-text-pdf/external/pubs/ft/scr/2007/_cr07118.pdf.md) - [Structured JSON version](/-/media/websites/imf/imported-full-text-pdf/external/pubs/ft/scr/2007/_cr07118.pdf.json) --- ### Introduction and methodology - Assessment carried out as part of the first Financial Sector Assessment Program (FSAP) mission to Denmark during the period November 7–18, 2005. - First external assessment of the banking supervision system in Denmark. - Assessment team included Peter Hayward (formerly, Bank of England), the Monetary and Capital Markets Department (MCM) of the IMF, and Stefan Spamer (Deutsche Bundesbank). - Assessment followed the Core Principles Methodology Document of October 1999 and focused on BCP 15 using the 1999 methodology. - DFSA completed a self-assessment and questionnaire in advance; ratings used: Compliant; Largely compliant; Materially noncompliant; Noncompliant; Not applicable. ### Institutional and market structure — key statistics and features - Total financial sector assets: close to five times GDP. - Credit institutions (end-2005): - Total assets: around 332 percent of GDP. - 170 credit institutions registered. - 161 commercial banks. - 8 mortgage banks. - 1 specialized bank. - Many small banks; common IT service centers used by many. - Danske Bank and Nordea Danmark account for more than 50 percent of commercial bank lending. - Five largest banking groups account for about 80 percent of total loans (71 percent if foreign branches are excluded). - Profitability and capital (2005 vs 2004): - Return on equity before tax for the sector as a whole: 21¼ (17¾) percent in 2005 (2004). - Average capital adequacy ratio: almost 13¼ (13½) percent in 2005 (2004); smaller banks typically have a larger ratio. - Balance-sheet trends: - Bank lending increased rapidly during 2004 and 2005. - Loan to deposit ratio is now over 100 percent. - Mortgage banks: - Total assets close to 134 percent of GDP. - Dominated by Nykredit and Realkredit Danmark which account for more than 70 percent of new gross lending. - Mortgage banks reported profits before tax of almost 11 (9⅓) percent on equity in 2005 (2004). - Profits on assets: 0.6 and 0.5 percent in 2005 and 2004, respectively. - Variable mortgage rates rose from less than 10 percent of mortgage loans in 2000 to almost half of new loans in 2005. - Deposit insurance: - Danish Guarantee Fund (DGF) covers deposits up to DKr 300,000 per depositor; certain special categories covered in full. - Membership in DGF is compulsory for all credit institutions. ### Supervisory structure, governance, and resources - Shared macroprudential responsibility: Danmarks Nationalbank (DNB) and the DFSA. - DFSA scope: financial holding companies, banks (including savings and cooperative banks), mortgage credit banks, life insurance and pension funds, nonlife insurance companies, insurance brokers, mutual funds, and securities regulation. - Coordination: - Coordination committee on financial stability chaired by the permanent secretary of MoEBA; meets every six months and when needed. - Memorandum of understanding (MoU) among DNB, Ministry of Finance, MoEBA, and DFSA (confirmed May 2005). - Major matters decided by Financial Business Council (FBC) and Securities Council. - Accountability and autonomy: - DFSA accountable to the minister of economics and business affairs; annual performance contract with director general. - Minister cannot issue instructions to DFSA except on certain legislative/regulatory matters but can ask DFSA to examine specific matters. - No specific statutory provision explicitly establishing the DFSA; established by government decision in 1998. - Supervisory approach and staffing: - Risk-based supervision using off-site reporting and prioritization of on-site exams. - Examination cycles: - Large institutions: comprehensive examinations over a four year cycle; in practice on-site work at least once a year. - Medium-sized institutions: examined at least every four years. - Smaller low-risk institutions: examined every seven years. - DFSA staff equivalent: 181 full time positions (total professionals employed 130; 46 solely involved in banking supervision — noted for 2005 figures). - Costs of supervision borne by supervised institutions but included in the fiscal budget and approved by the legislature. - DFSA has a permanent appropriation for preparation for Basel II. - External review: - National audit office (NAO) audit (published September 2005) recommended shortening frequency of comprehensive on-site inspections; upgrading supervision of IT systems; more effective follow-up; suggested reducing sample size of loan portfolio review if bank provisioning policies adequate and implemented. ### Legal mandate, regulatory instruments, and key legislative provisions - Core statute: Financial Business Act (FBA) — Consolidated Act no. 613 of June 21, 2005. - Section 344 of the FBA: - DFSA shall supervise compliance with this Act and regulations laid down pursuant to this Act except for section 77(1) and (2). - DFSA may request information and documents from foreign supervisory authorities and undertake direct inspections in foreign establishments of banks. - Reporting and information powers: - Section 353: DFSA reports to MoEBA on its activities at least on an annual basis. - Section 347: DFSA has power to demand information from credit institutions, qualifying shareholders, and consolidated group companies. - Section 350/1: DFSA can take and/or require a bank to take supervisory measures. - Sections 224/1 and 225/1: additional regulation for withdrawing a license if capital is not raised within DFSA-set time limit. - Regulatory instruments: executive orders (EOs), guidelines, circulars, consultative guidelines; EOs have stronger legal force. - Selected EOs (preserved verbatim in source): EO on valuation by properties by Mortgage Banks – (262 of April 12, 2005); EO on capital adequacy – (9712 of December 22, 2004); EO on Large Exposures – (1487 of December 13, 2004); EO on Intra-Group Transactions – (904 of September 1, 2004); EO on Funding, the Balance Principle, Interest Rate Risk and Liquidity Risk of Mortgage Banks – (1190 of December 17, 2003); EO on Auditing Financial Undertakings and Financial Groups – (1183 of December 15, 2003); EO on the Guarantee Fund for Depositors and Investors – (1055 of December 8, 2003); EO on Good Business Practice for Financial Undertakings – (604 of June 26, 2003); EO on the Collaboration between the Danish Financial Supervision Authority and a Guarantee Fund for Depositors and Investors – (92 of February 19, 2002). - Guidelines (selected): Consultative Guidelines no. 9377 of June 30, 2005; Guidelines on IT control and security measures; Guidelines no. 9040 of January 12, 2005 for Banks pursuant to section 71(2) of the FBA. ### Licensing, ownership, and permissible activities (CPs 2–5 highlights) - Licensing: - DFSA sole authority to grant banking licenses (Sections 7 and 14). - Initial capital requirement for a bank or mortgage-credit institution: €8 million (FBA Sections 7(8) and 14(1)). - Minimum capital requirement for an operating bank: €5 million (Section 124/1 (no 2)). - DFSA ensures capital present on the day license issued; may suspend voting rights and revoke licenses under specific provisions. - Ownership and qualifying interests: - Qualifying interest: direct or indirect holding representing 10 percent or more of share capital or votes (Section 5/3). - Prior notification and authorization required for acquisitions reaching thresholds: 10 percent, 20 percent, 33 percent, 50 percent, or control (Section 61/1). - Information on owners of qualifying interests must be submitted annually no later than February (Section 61/8). - Permissible activities: - FBA defines “bank” (Section 7/1) and permissible transactions (Annex 1 and Sections 24–26). - Banks may be licensed as securities dealers to carry out activities in Annex 4, Schedules 1 and 3. - Mortgage-credit institutions defined in Section 8/1 with exclusive name rights and specified permissible activities. - Investment limits and intra-group rules: - Holdings in other companies by banks may not exceed 100 percent of base capital (Section 146/1) unless exempted. - Excess of any single investment above 15 percent of liable capital and sum above 60 percent of liable capital are deducted from liable capital (Section 139/5 and 6). - Intra-group exposures normally allowed up to 25 percent of the minimum solvency requirement in addition to surplus capital; intra-group exposures may not exceed 100 percent of base capital. - Assessments: - Licensing and ownership: assessments ranged from Compliant to Largely compliant depending on specifics (e.g., CP 3 assessed Largely compliant). - Investment criteria: Largely compliant; FBA does not require prior approval for investments in non-financial companies. ### Prudential framework and capital adequacy (CPs 6–9, 11–12) - Capital framework: - Eligible components set out in FBA Section 128. - Hybrid core capital under Subsection (1), no. 7, limited to no more than 15 percent of the core capital after deductions (Section 128-related). - Additional capital shall not be included with more than 100 percent of the core capital after deductions. - Base capital of banks and mortgage-credit institutions shall constitute no less than 8 percent of the risk-weighted items (FBA Section 124). - FBA Section 124/4: DFSA has right to establish a higher rate of capital adequacy for individual banks. - Capital adequacy ratios calculated on both consolidated and solo bases (Sections 170 and 172/2). - Reporting and enforcement: - Banks must report capital adequacy ratio solo and consolidated quarterly. - Very small banks with ‘employed’ capital less than DKr 250 million report capital ratios and components every half year. - Section 75/3: DFSA to be informed immediately when capital requirements not met. - FBA Section 225/1: failure to raise required capital within DFSA-set time limit can lead to license withdrawal. - Credit policies and provisioning: - Boards must prepare written guidelines and procedures for significant areas (FBA Sections 70 and 71(1)). - IFRS adoption effective January 2005; valuations and provisioning based on IAS No. 39 and EO on Financial Reports for Credit Institutions and Investment Companies. - DFSA may order a bank to change level of provisions (FBA Section 344). - Reporting: quarterly and annual reporting of asset quality and provisions; from end-2005 banks to report weak exposures not meeting objective impairment evidence. - Large exposures: - EO on Large Exposures: exposures in excess of 10 percent of base capital reported quarterly; exposures may not exceed 25 percent of base capital after certain high-quality collateral (FBA Section 145(3)). - Total of all exposures in excess of 10 percent must not exceed 800 percent of base capital. - Market risk and internal models: - DFSA verifies IT systems, risk management, valuation, and limit adherence during on-site exams. - Banks authorized to use internal models (so far only three) required to perform scenario analysis and stress testing; model approvals typically for one year. - DFSA established a Credit and Market Risk Division for major banks. - Assessments: - Capital adequacy, credit policies, loan evaluation, and large exposure rules: generally assessed Compliant. - Market risk supervision: Compliant (comments noted limited resources and limited number of institutions with sophisticated trading). ### Supervision practices — on-site, off-site, validation, internal controls, audit (CPs 13–21) - On-site and off-site integration: - DFSA appoints an 'accountable officer' (AO) for each bank. - Supervisory program for larger banks covers a four year period; in practice large banks receive on-site work at least once a year. - Smaller banks inspected once every four years; very small banks once every seven years. - Off-site supervision based on quarterly and annual returns aligned with IFRS. - Banks rated annually on a scale of 1–9 (1–3 being vulnerable and 4 being borderline); ratings used to prioritize inspections and stress tests. - Internal control and audit: - All banks except very small institutions required to have a professionally qualified internal auditor reporting directly to the board. - EO on Auditing Financial Undertakings and Financial Groups sets auditor work areas; DFSA may dismiss external auditors and appoint additional auditors (FBA Section 199). - Auditors (internal and external) have legal obligation (FBA Section 200) to report matters of material importance to the DFSA. - Validation and reliance on auditors: - Supervisory information validated by Economics, Statistics, and IT Supervision Division via statistical tests; fundamental accuracy ensured during on-site inspections. - DFSA power to commission extraordinary audit at bank's expense where doubts exist. - Assessment for validation: Largely compliant — on-site infrequency increases reliance on auditors. - Other risks, liquidity, and operational risk: - FBA Section 152: stock liquidity requirement — 15 percent of liabilities maturing within one month, and 10 percent of all liabilities, covered by specified liquid assets; reported quarterly. - Mortgage banks subject to tight liquidity restrictions per the ‘balance’ principle. - DFSA requires banks to set internal risk parameters; IFRS requires published statement of bank's risk appetite. - Assessment for other risks: Largely compliant — comments call for routine monitoring of net funding requirements, stress testing, and contingency planning. ### Remedial measures, enforcement, and publication powers (CP 22) - Range of DFSA sanctions: - From informal warnings, directions, additional capital requirements, suspension of payments, appointment of a conservator, to revocation of license. - “Bill of health” under FBA Section 349 used to require stress tests; Section 350 allows time-bound orders where depositors’ interests at risk. - DFSA may remove a member of the board of management (FBA Section 351); no explicit power to remove board directors (license withdrawal available). - In serious cases DFSA may order suspension of payments under FBA Section 238 and petition courts under FBA Section 234 to commence liquidation. - For reporting failures DFSA can levy fines; police prosecutions may lead to fines or prison sentences of up to four months. - Publication authority: - Section 54A gives DFSA authority to publicize action taken against banks in specified instances. - Assessment: Largely compliant (with limitations on powers to remove some key managers, absence of an explicit prompt corrective action regime, and no explicit power to restrict dividends though DFSA can act where depositor interests at risk). ### Cross-border, consolidated, host and host/foreign supervision (CPs 23–25) - Consolidated supervision: - Part 12 of the FBA and Sections 170–172 provide DFSA means to conduct consolidated supervision; prudential requirements apply to group and individual institutions. - DFSA can require licensed entities to supply information on non-licensed group entities; FBA Section 14 can prevent licensing where supervision would be impeded. - Assessment: Compliant. - Host country supervision and MoUs: - DFSA has signed MoUs with supervisory authorities in United Kingdom, France, Germany, Ireland, Netherlands, Hong Kong, the Scandinavian countries, Estonia, and Lithuania. - Common Nordic MoU with Sweden, Norway, Finland, and Iceland; since 2000 Nordic authorities operate a cooperation agreement on supervision of the Nordea Group. - DFSA may permit foreign supervisors to inspect Danish branches after prior notification (Section 346/4). - Assessment: Compliant (host country); supervision over foreign banks’ establishments assessed Largely compliant with comments on absence of formal requirement to obtain home supervisor approval and limited assessment of home supervisor consolidated practices). - Limitations and recommendations: - DFSA does not formally require, before issuing a license, approval (or notice of non-objection) from the home supervisor. - DFSA does not formally assess whether the home country supervisor practices consolidated global supervision. ### Recommended action plan (selected) - CP 1.1: A law or provision formally establishing the DFSA is desirable to make the organization of financial supervision in Denmark more transparent. - CP 1.2: DFSA would have more flexibility if it had its own budget. - CP 3 / CP 14 / CP 22: - Extend "fit and proper" test to holders of other key management positions. - Consider elevating internal controls guidelines to an executive order. - CP 5: FBA should require prior approval for investments in non-financial companies. - CP 10: DFSA should consider discretionary powers to judge existence of connections between a bank and other parties. - CP 13: Introduce routine monitoring of net funding requirements, stress testing, and contingency planning for liquidity crises under various scenarios. - CP 17: Consider routine meetings with management of banks where on-site inspections are infrequent. - CP 25: Develop approach to assess home country supervisory systems when licensing banks from countries not represented in Denmark. ### Authorities’ response and policy developments - Broad agreement with IMF assessment, with some exceptions and clarifications. - Consideration will be given to establishing DFSA as an independent institution by providing a statutory basis and separating regulatory and supervisory budget. - Increased resources allocated due to the Capital Requirement Directive and the Third Money-Laundering Directive. - DFSA developing use of stress tests and building stress testing capacity; this will require increased resources. - Basel II implementation: - New Basel II capital requirements could result in potentially large decreases in minimum capital requirements for institutions applying internal rating based approaches and advanced measurement approaches. - Danish regulation includes floors limiting maximum decrease in capital requirements for advanced methods in 2007, 2008, and 2009 in accordance with the EU Capital Requirement Directive. - DFSA can set additional capital requirements in individual cases where minimum requirements decrease in ways that do not reflect institution risks. - DFSA cautious on expanding fit & proper scope for all key staff due to administrative burden and resource implications. - DFSA plans to enhance liquidity supervision, stress testing, and contingency planning as part of Basel II implementation. *Source: https://www.imf.org/-/media/websites/imf/imported-full-text-pdf/external/pubs/ft/scr/2007/_cr07118.pdf* ### 1. Detailed Assessment of Compliance of the Basel Core Principles......................................12 ### 1. Detailed Assessment of Compliance of the Basel Core Principles......................................12 ### Introduction and mission - Assessment carried out as part of the first Financial Sector Assessment Program (FSAP) mission to Denmark during the period November 7–18, 2005. - First external assessment of the banking supervision system in Denmark. - Assessment team included Peter Hayward (formerly, Bank of England), the Monetary and Capital Markets Department (MCM) of the IMF, and Stefan Spamer (Deutsche Bundesbank). ### Information and methodology used for assessment - DFSA completed a self-assessment of the BCP and a questionnaire in advance of the mission; responses were reviewed and clarified through interviews and document review. - Assessment followed the Core Principles Methodology Document of October 1999, examining observance of essential criteria and, where appropriate, additional criteria. - The assessment focused on BCP 15 using the 1999 methodology. - Compliance ratings defined as: - Compliant: all essential criteria generally met without significant deficiencies. - Largely compliant: only minor shortcomings. - Materially noncompliant: shortcomings sufficient to raise doubts about ability to achieve compliance. - Noncompliant: no substantive progress toward compliance. - Not applicable: CP does not apply given structural, legal, and institutional features. ### Institutional and macroprudential setting; market structure overview - Danish financial sector described as deep and sophisticated; total financial sector assets close to five times GDP. - Since deregulation in 1970–1980s, financial firms’ business lines expanded; banks may enter insurance and other businesses via subsidiaries and associated companies; holding companies and group structures permitted. - Noted history of mergers, group formations, and some break-ups over the last two decades. ### Credit institutions - At end-2005, total assets of credit institutions were around 332 percent of GDP. - Number and type of institutions: - 170 credit institutions registered in Denmark. - 161 commercial banks. - 8 mortgage banks. - 1 specialized bank. - Market structure and concentration: - Many small banks; common IT service centers used by many. - Danske Bank and Nordea Danmark account for more than 50 percent of commercial bank lending. - Five largest banking groups account for about 80 percent of total loans (71 percent if foreign branches are excluded). - Profitability and capital: - Return on equity before tax for the sector as a whole: 21¼(17¾) percent in 2005 (2004). - Average capital adequacy ratio: almost 13¼ (13½) percent in 2005 (2004); smaller banks typically have a larger ratio. - Balance-sheet trends: - Bank lending increased rapidly during 2004 and 2005. - Loan to deposit ratio is now over 100 percent. ### Mortgage financing - Mortgage banks total assets close to 134 percent of GDP. - Mortgage sector structure: - Slightly smaller than commercial banks in aggregate. - Dominated by Nykredit and Realkredit Danmark, which account for more than 70 percent of new gross lending. - Nykredit owns a bank; Realkredit Danmark is part of Den Danske banking group. - Profitability and risk characteristics: - Mortgage banks reported profits before tax of almost 11 (9⅓) percent on equity in 2005 (2004). - Corresponding profits on assets: 0.6 and 0.5 percent in 2005 and 2004, respectively. - Loan losses historically very modest; in 2004 and 2005 some banks reported negative loan losses due to revocation of previous provisions. - Product trends: - Variable mortgage rates rose from less than 10 percent of mortgage loans in 2000 to almost half of new loans in 2005. - Increase in mortgage loans with deferred repayment for a specified period. ### Supervisory structure and practices - Financial sector stability is a shared responsibility of Danmarks Nationalbank (DNB) and the DFSA. - DFSA responsibilities: - Overseeing various financial institutions and regulation of investment business. - Supervisory authority extends to financial holding companies, banks (including savings and cooperative banks), mortgage credit banks, life insurance and pension funds, nonlife insurance companies, insurance brokers, mutual funds, and securities regulation. - Coordination and governance: - Coordination committee on financial stability chaired by the permanent secretary of the ministry of economics and business affairs (MoEBA); meets every six months and when needed. - Memorandum of understanding (MoU) concerning financial supervision concluded among DNB, the Danish Ministry of Finance, MoEBA, and the DFSA (confirmed May 2005). - DFSA is accountable to the minister of economics and business affairs and agrees an annual performance contract with the director general. - Major or principle matters decided by independent councils established under the Financial Business Act (FBA): the Financial Business Council (FBC) and the Securities Council; a pension market council also established. - Minister cannot issue instructions to DFSA except on certain legislative and regulatory matters but can ask DFSA to examine specific matters. - Supervisory approach and resources: - DFSA applies a risk-based supervisory approach using off-site reporting and prioritization of on-site examinations. - Examination cycles: - Large institutions: comprehensive examinations over a four year cycle. - Medium-sized institutions: examined at least every four years. - Smaller low-risk institutions: examined every seven years. - In large banking groups, at least one risk area inspected each year and DFSA meets at least annually with management. - DFSA staff equivalent to 181 full time positions. - Costs of supervision borne by supervised institutions but included in the fiscal budget and approved by the legislature. - Implementation of IFRS and Basel II expected to reduce capital cushions and demand closer monitoring; new AML/CFT legislation expected to affect resource use. - External review and suggestions: - National audit office (NAO) audit (published September 2005, Danish language) recommended improvements, especially supervision of non-life insurance: - Need to shorten frequency of comprehensive on-site inspections. - Upgrade supervision of IT systems. - Make follow-up of inspections more effective. - Suggested reducing sample size of loan portfolio review if bank’s own provisioning policies appeared adequate and implemented. ### Deposit insurance and cross-border branches - Deposit insurance: Danish Guarantee Fund (DGF) covers deposits up to DKr 300,000 per depositor; certain special categories of deposit covered in full. - Membership in DGF is compulsory for all credit institutions. - DGF managed by a board appointed by the minister for economics and business affairs and supervised by the DFSA. - Foreign bank branches may buy add-up insurance in the DGF if their national coverage is not at the Danish level. ### Preconditions for effective supervision - Preconditions largely in place: - EU directives adopted and implemented in financial legislation; noted that EU adoption resulted in less strict capital requirements for commercial banks. - Payments systems effective and reliable. - Contracts readily enforceable; banks report no problems realizing security. - External audit function effective and to international standards. - Public governance framework basically sound. - International indicators: - Denmark listed as the fourth most favorable on anti-corruption in 2005 Corruption Perception Index published by Transparency International. *Source: https://www.imf.org/-/media/websites/imf/imported-full-text-pdf/external/pubs/ft/scr/2007/_cr07118.pdf* ### 21. IFRS were adopted for all listed companies and by all financial enterprises, effective ### _cr07118 - 21. IFRS were adopted for all listed companies and by all financial enterprises, effective ### IFRS adoption and corporate disclosure - IFRS were adopted for all listed companies and by all financial enterprises, effective January 2005. - Adoption of IFRS has resulted in a decline in provisions by many banks. - The authorities describe the change as moving from a conservative provisioning policy to a neutral provisioning policy. - Joint stock companies and limited liability companies are required to submit audited financial statements to the company registrar. ### Corporate governance reforms and disclosure regime - The Nørby Committee was established in 2001 to make recommendations on measures to improve corporate governance. - The Nørby Committee decided to make specific Danish recommendations instead of using international standards such as the OECD’s Principles of Corporate Governance. - The Nørby Committee’s recommendations seek voluntary compliance. - Listed companies that do not implement any of the recommendations are obliged to explain deviations in their annual reports to shareholders. ### Summary of the Core Principles Assessment — Overview - The basic legal framework is contained in the FBA, and in executive orders and explanatory guidelines issued pursuant to the FBA. - These provide powers for the DFSA to supervise all financial institutions. - The DFSA is the sole authority responsible for supervision of the financial sector; therefore, a defined mechanism for coordinating supervision of different types of institutions is not needed. - The DFSA has a range of remedial measures and sanctions; cases with serious breaches of certain prudential regulation are transferred to the police. - No visible evidence of undue government or industry interference in the work of the DFSA. ### Objectives, autonomy, powers, and resources (CP 1) - The DFSA is an institution for which the minister of economic and business affairs is responsible to parliament; this could conceivably impede the DFSA’s autonomy. - The minister of economics and business affairs might overrule DFSA decisions on the advice of the FBC regarding issuance of executive orders. - The MoEBA could instruct or influence the DFSA by proposing new legislation against the advice of the DFSA. - A law establishing the DFSA could ensure its role as an autonomous supervisory authority and make the agency’s position more transparent. - The DFSA’s budget is incorporated into the overall government budget and is subject to passage of the annual Finance Act. - Legal protection for supervisors is not provided in specific legislation, but general legislative arrangements ensure staff are protected against law suits while discharging their duties in good faith. ### Licensing and structure (CPs 2–5) - The FBA defines clearly the term “bank” and permissible activities of banks. - In the licensing process, applicants must inform the DFSA of all relevant information, including fitness and propriety of members of the Board of Directors and of the Board of Management, and the suitability of shareholders. - Under the FBA, the DFSA has authority to grant authorization for acquisitions or increases of qualifying holdings. - Investments in other companies that are not credit institutions, financial institutions or ancillary banking undertakings are restricted to a total amount of 100 percent of the liable capital; additional restrictions limit individual investments. ### Prudential regulation and requirements (CPs 6–15) - Rules and regulation regarding capital adequacy conform to the Capital Accord of the Basel Committee on Banking Supervision. - Under Sections 170 and 172/2 of the FBA, capital adequacy ratios are calculated on both a consolidated basis for banking groups and on a solo base for banks within a group. - The solvency ratio requirement also applies to bank holding companies. - Denmark has implemented the European Parliament and Council Directive 2000/12/EC, and Council Directive 93/6/EEC on the Capital Adequacy of Investment Firms and Credit Institutions. - The FBA Section 124 states that the base capital of banks and mortgage-credit institutions shall constitute no less than 8 percent of the risk-weighted items (the solvency requirement) and should be maintained at all times. ### Methods of on-going supervision (CPs 16–20) - The DFSA relies mainly on on-site inspection of banks supplemented by analysis of periodic reporting. - Large banks are inspected under a four year cycle which covers all the principal areas of risk. - In practice supervisors do on-site work in the banks at least once a year but often more frequently. - Smaller banks are inspected once every four years unless they are considered vulnerable. - Very small banks posing minimal risk are inspected only once every seven years. - All banks are subject to off-site reporting requirements; resulting data is analyzed on at least a quarterly basis. - Annual assessments produce ratings used to prioritize high risk banks for on-site examinations. - The DFSA relies on internal and external auditors who are obliged to provide reports to ensure the accuracy of off-site reporting. ### Information requirements (CP 21) - Banks are required to comply with IFRS. - The DFSA has the power to dismiss external auditors and appoint additional auditors. - External audit obligations are set out by the DFSA. - Supervisors see reports prepared by internal and external auditors that contain information specifically required by supervisors. ### Formal powers of supervisors (CP 22) - The DFSA’s sanctions range from informal warnings, directions, additional capital requirements, suspension of payments, appointment of a conservator, to revocation of the license. - Serious breaches of certain prudential regulation are transferred to the police. ### Cross-border banking (CPs 23–25) - The FBA provides the DFSA with means to conduct supervision of credit institutions on a consolidated basis. - The DFSA may request information and documents from foreign banks and financial market supervisory authorities and has authority to undertake direct inspections in foreign establishments of banks. - Banks are required to obtain the DFSA’s approval before establishing a subsidiary or branch outside Denmark. - The DFSA can withdraw a bank’s license, but has no direct authority to require closing of overseas offices. - The DFSA has signed MoUs with several relevant supervisory authorities and holds regular meetings, particularly in connection with on-site inspections. - Since 2000, the Nordic supervisory authorities have operated a cooperation agreement on the supervision of the Nordea Group. - Foreign banking institutions are subject to similar regulatory requirements as other banks operating in Denmark. - Current legal provisions give the DFSA powers to access information on a subsidiary of a foreign banking institution in Denmark. - The DFSA has powers to share information needed by home country supervisors for consolidated supervision. - The DFSA does not formally require, before issuing a license, approval (or notice of non-objection) from the home supervisor. - The DFSA does not formally assess whether the home country supervisor practices consolidated global supervision. ### Additional legal/territorial note - The legislation and prudential regulation for banks does not automatically cover the Faeroe Islands and Greenland; the legislation and regulation is entered into force separately in these parts of the country approximately one year after the changes enter into force in Denmark. ### Institutional history and legal framework (excerpt) - The FBA (Consolidated Act no. 613 of June 21, 2005) provides the statutory and legal framework for banking supervision. - The DFSA was established in 1998 as an integrated financial supervisor and one of its tasks is the supervision of the banking sector. *Source: https://www.imf.org/-/media/websites/imf/imported-full-text-pdf/external/pubs/ft/scr/2007/_cr07118.pdf* ### Section 344 of the FBA specifies the responsibility of the DFSA as follows: ### Section 344 of the FBA specifies the responsibility of the DFSA as follows: ### Legal mandate and core responsibilities - Section 344 of the FBA: the DFSA shall supervise compliance with this Act and regulations laid down pursuant to this Act except for section 77(1) and (2). - The Danish Commerce and Companies Agency supervises compliance with: section 15(1), (2) and (4) and sections 83, 87, 91 and 112 (company incorporation and registration matters). - The Danish Securities Council, together with the DFSA, ensures observance of financial information regulations in sections 183-193 and regulations pursuant to section 196 for financial undertakings with securities admitted for listing or trading on a stock exchange or traded on an authorized market place; the Danish Securities Council performs the authorities laid down in section 197. - Section 353: the DFSA reports to the MoEBA on its activities at least on an annual basis. - Section 347: the DFSA has the power to demand information from credit institutions and qualifying shareholders and consolidated group companies in the form and frequency it deems necessary. - Section 350/1: the DFSA can take and/or require a bank to take supervisory measures. - Sections 224/1 and 225/1: additional regulation for withdrawing a license, e.g., if capital is not raised within a DFSA-set time limit. ### Cross-border and cooperation provisions - Section 344(2): for branches of credit institutions licensed in another EU country or in a country with which the Community has entered into agreement for the financial area, the Danish FSA shall, in accordance with provisions laid down in EU Directives, supervise liquidity in such branches. - Section 344(3): where a supervised entity is a subsidiary of a parent in another EU country or equivalent third country, the DFSA may, upon agreement, transfer responsibility for supervision of solvency and major exposures to the authority carrying out consolidated supervision of the foreign parent undertaking. - Section 344(4): the DFSA may, in special cases, utilize foreign assistance. - The DFSA may request information and documents from foreign supervisory authorities and undertake direct inspections of foreign establishments of banks. - Several MoUs on information sharing exist with: United Kingdom, France, Germany, Ireland, Holland, Hong Kong, the Scandinavian countries, Estonia, and Lithuania. - A general MoU exists between the Governor of DNB and the Director General of the DFSA regarding financial surveillance, covering cooperation in relevant areas including statistics. - Section 354/9: confidentiality rules require international cooperation agreements and that recipients be subject to a statutory duty of confidentiality; no specific direct requirement exists for DFSA to take reasonable steps to ensure confidential information released to another supervisor will be used only for supervisory purposes. ### Regulatory instruments, standards, and publication powers - The DFSA issues prudential regulations as executive orders (EOs), guidelines, circulars, and consultative guidelines; EOs have stronger legal force than guidelines or circulars. - The FBA lays down the framework of minimum prudential standards banks must meet and permits qualitative judgment by the supervisor. - Under Sections 183, 196, and 197 the DFSA ensures all banks provide audited annual reports and lays down form, extent, and publication deadlines. - The DFSA frequently publishes information on the financial strength and performance of the industry on its website. ### Major laws, executive orders, and guidelines (as listed in the source) - Acts: - The FBA—Consolidated Act No. 613 of June 21, 2005 - Guarantee Fund for Depositors and Investors Act—Consolidated Act No. 1066 of December 10, 2003 - Mortgage-Credit Loans and Mortgage-Credit Bonds Act—Act No. 454 of June 10, 2003 - Executive Orders (selected listings preserved verbatim): - EO on valuation by properties by Mortgage Banks – (262 of April 12, 2005). - EO on capital adequacy – (9712 of December 22, 2004). - EO on the rules of Procedure for the Financial Business Council – (1363 of December 15, 2004). - EO on Large Exposures – (1487 of December 13, 2004). - EO on Pension Pools and other Tax-Privileged Savings. (1160 of November 29, 2004). - EO on Intra-Group Transactions – (904 of September 1, 2004). - EO on Reporting of Large Exposures for Groups where the Parent Company is a Financial Holding Company or a Financial Undertaking Full Consolidated Statements are not Prepared – (793 of July 10, 2004). - EO on Choice of Law, with regard to suspension or compulsory composition, compulsory dissolution or bankruptcy of banks mortgage-credit institutions and electronic money institutions – (674 of June 24, 2004). - EO on Funding, the Balance Principle, Interest Rate Risk and Liquidity Risk of Mortgage Banks – (1190 of December 17, 2003). - EO on Auditing Financial Undertakings and Financial Groups – (1183 of December 15, 2003). - EO on the Guarantee Fund for Depositors and Investor – (1055 of December 8, 2003). - EO on the instruments and contracts, in addition to those mentioned in annex 5 of the FBA, with which banks and investment companies may carry out services – (984 of December 5, 2003). - EO on Good Business Practice for Financial Undertakings – (604 of June 26, 2003). - EO on the Collaboration between the Danish Financial Supervision Authority and a Guarantee Fund for Depositors and Investors – (92 of February 19, 2002). - Guidelines (selected): - Consultative Guidelines no. 9377 of June 30, 2005. Calculation of Solvency Need – Consultative Guidelines in accordance with sections 124(3) and 125(5) of the FBA. - Guidelines on IT control and security measures. - Guidelines no. 9040 of January 12, 2005 for Banks pursuant to section 71(2) of the FBA (A similar Guidelines for Mortgage Banks is about to be issued). ### Organizational arrangements, independence, accountability, and resources - Legal and institutional context: - The DFSA is the sole authority for banking supervision for institutions and mortgage banks licensed under the FBA; defined coordination mechanism between multiple supervisors is not necessary. - The DFSA cooperates with the MoEBA and with DNB; an MoU on general cooperation with DNB is in place. - The director general and senior management do not participate in plenary sessions of parliament; DFSA communicates with parliament via the minister of economic and business affairs. - The minister for economic and business affairs may lay down more detailed regulations for DFSA procedures in accordance with community law. - Independence and potential constraints: - The DFSA reports to the MoEBA; the MoEBA is the director general’s ultimate superior and may give instructions, ask for reports, or present legislation that could influence DFSA work. - The FBC takes decisions on supervisory matters of principle and matters with far-reaching consequences; the FBC advises the DFSA on regulations and supervisory matters and assists in information activities. - There is no statutory provision explicitly establishing the DFSA; establishment by government decision is a common tradition in Denmark. - Budgetary and staffing details: - The DFSA has no budgetary independence; expenses included in central government budget and approved by Parliament in the annual Finance Act. - DFSA may build up reserves; costs are recovered from supervised undertakings (FBA Section 360). - Salary policy: based on Danish government service scales; limited ability to match private sector remuneration; some flexibility exists. - Travel budget for on-site work permits appropriate supervision on a (global) consolidated basis. - Total number of professionals employed with the DFSA is 130, of which 46 are solely involved in banking supervision (in 2005, total number of full-time staff was 181). - The DFSA has a permanent appropriation for preparation for Basel II. - In 2004, the turnover level was 7 percent for the DFSA as a whole. - Assessment concluded: "Largely compliant." Comment noted potential resource strain from increased on-site inspections, Basel II implementation, and new anti-money laundering law. ### Licensing, enforcement, and remedial powers - Authority to grant and withdraw licenses: - Sections 7 and 14: DFSA responsible for granting banking licenses. - Sections 223–225: DFSA responsible for withdrawing banking licenses. - Foreign banks and branches: - Foreign banks and foreign entities of Danish banks authorized to open branches and subsidiaries only after prior notification to the DFSA. - Enforcement tools: - DFSA can order banks to comply with FBA and other laws; in cases of material noncompliance DFSA may, subject to approval by the FBC, withdraw a bank’s license (see CP 22). - No legal basis exists to force a problem bank to merge; DFSA can seek a mandate from the minister of economic and business affairs to participate in "orderly resolution of a bank with problems." - Legal protection for supervisors: - FBA does not address legal protection for supervisors explicitly. - The Act on Liability Claims provides legal protection to all employees of all organizations for actions taken in good faith. - An employee will be personally responsible only if acting with gross negligence; in practice personal liability for civil servants is close to nonexistent except in willful misconduct. - Assessment: "Compliant." ### Assessments and key conclusions (as stated) - Principle 1 overall assessment: Compliant. - Principle 1(2) assessment: Largely compliant. - Principle 1(3) assessment: Compliant. - Principle 1(4) assessment: Compliant. - Principle 1(5) assessment: Compliant. - Principle 1(6) assessment: (description provided; confidentiality rules summarised above). - Commentary highlights: - A specific statutory provision explicitly establishing the DFSA would clarify autonomy and accountability, although government-established authorities are common in Denmark. - DFSA operates with substantial practical autonomy and professional credibility; the minister’s oversight and budget arrangements pose potential constraints. - Resources appear adequate for present responsibilities but may need augmentation to meet increased on-site inspection demands (Basel II, anti-money laundering law). *Source: _cr07118 - Section 344 of the FBA specifies the responsibility of the DFSA as follows:* ### Section 354/5 (which deals with matters being considered by the Company Appeals Board). If ### _cr07118 - Section 354/5 (which deals with matters being considered by the Company Appeals Board). If ### Confidentiality and Section 354/5–354/6 - If the DFSA has to forward any confidential information as a result of a demand mentioned in Section 354/5, the information will still have to be held confidential by the receiver, as stipulated in Section 354/6. - Assessment: Compliant. ### Principle 2 — Permissible Activities Description: - The term bank is defined in Section 7/1 of the FBA as a company whose principal and permanent activity is to receive cash deposits and to grant loans for its own account and provide other financing, except on the basis of issuing mortgage-credit bonds. - Banks have the exclusive right and obligation pursuant to FBA Sections 7/5 and 7/6 to use the words “bank,” “sparekasse,” or “andelskasse” in their name. - The FBA Annex 1 and Sections 24–26 list permissible transactions and actions for banks, including directly ancillary or supplemental activities. - Banks may be licensed as securities dealers to carry out activities mentioned in Annex 4, Schedules 1 and 3. - Only DFSA-licensed institutions may use the terms “bank,” “sparekasse,” or “andelskasse” in company name, designation of business purpose, or advertising (Section 7/5). - The term mortgage-credit institution is defined in Section 8/1 of the FBA; such institutions grant loans against registered mortgages on the basis of issuing mortgage-credit bonds and have exclusive name rights (e.g., “realkreditinstitut,” ”realkreditaktieselskab,” “kreditforening,” “realkreditfond”). - Mortgage-credit institutions may carry out activities in Annex 3 and Sections 24–26 and may be licensed as securities dealers to carry out activities in Annex 4, Schedule 1, regarding mortgage-credit bonds and derived instruments. - Section 7/3 of the FBA lists undertakings with the exclusive right to receive from the public deposits or other funds to be repaid: - banks; - the state; - Danmarks Nationalbank; - foreign credit institutions; - issuers of electronic money supervised by the DFSA pursuant to Part 19 of the FBA; - savings undertakings supervised according to Part 20 of the Act; and - mortgage-credit institutions, DSF (Danmarks Skibskreditfond), and KommuneKredit may receive other funds to be repaid. - Undertakings not receiving deposits from the public may receive other repayable funds provided such activity or lending is not a significant part of normal activities. Assessment: Compliant. ### Principle 3 — Licensing Criteria Description and findings: - Prior to engaging in banking activities in Denmark, each institution must obtain a license from the DFSA (Sections 7 and 14 of the FBA); DFSA is the sole authority for granting banking licenses. - A Danish banking license is not limited to specialized business fields. - Before granting a license, DFSA must ensure criteria in Section 14/1 and 14/2 are met, including: - use of the term “bank,” “sparekasse,” or “andelskasse” in the name (Section 7/5); - a share capital of no less than €8 million (Section 7/1); - organized as a limited company (Section 12); - intangible assets are not used to pay for shares in banks and mortgage-credit institutions (Section 13). - DFSA usually requires a description of the basis for business activities (explanatory note to Section 14/1). - DFSA's licensing guidance and practice are consistent with the EU's Banking Directive. - Banks must manage business according to sound administrative principles and maintain internal controls, reporting arrangements, and procedures. - DFSA can withdraw a license under Section 224/1 if a bank does not adhere to criteria applied when issuing the license; ongoing supervision based on Section 346/1. - Initial capital requirement for a bank or mortgage-credit institution is €8 million (FBA Sections 7(8) and 14(1)); minimum capital requirement for an operating bank is €5 million (Section 124/1 (no 2)). - During licensing, DFSA must ensure capital is actually present on the day the license is given. - DFSA does not trace the source of initial capital but must inform the Public Prosecutor for Serious Economic Crime if it learns of circumstances presumed associated with money laundering or financing of terrorism. - DFSA establishes financial soundness of prospective owners and ability to support the business; criteria for issuing licenses are consistent with ongoing supervision. - Section 14/1 and 3 give DFSA right to reject applications if criteria are not fulfilled or information is inadequate; DFSA published a Guideline for License Applications for Banks. - FBA enables DFSA to reject legal and managerial structures that hinder effective supervision; requires assessment of suitability of major shareholders, transparency of ownership, and source of initial capital. - Pursuant to Section 14/1 no. 3, DFSA shall only grant a license when owners of qualifying interests will not oppose appropriate and reasonable management — DFSA conducts fit and proper evaluations on owners of qualifying interests. - Fit and proper evaluation criteria for board members and board of management per Section 14/1 no. 2 in conjunction with Section 64 and DFSA guidelines (education, experience, professional qualification, trustworthiness). - License applications must include CVs and statements regarding liability for violations; rejection is final also for future applications. - DFSA may suspend voting rights of noncomplying shareholders up to revoking the banking license in severe cases; no quantitative limitation on ownership otherwise. - Application must include pro forma financial statement (budget for a 3-year period), financial information on principal shareholders, articles of association, business description, standing orders for board, instructions, and written procedures for significant business areas. - Board of directors must prepare written guidelines on significant activities (Section 70); banks must have per Section 71/1, Nos. 1–3: - good administrative and accounting practices; - written procedures for all significant areas of activity; - full internal control procedures. - Companies Act Section 54/1, 2nd clause: Board of Directors responsible for proper organization of business. - DFSA “Guidelines for banks pursuant to Section 71/1, Nos. 1–3, of the FBA” (No. 9040 of January 12, 2005) require procedures to be: - kept up to date; - easy to read; - describe actual circumstances; - assign clear responsibility for each task; - show who completed each task; - contain control elements. - Foreign undertaking licensed in EU/EEA may begin activities in Denmark through a branch two months after DFSA has received notification from home country supervisor (Section 30/1) — implies at least a statement of “no objection”; specific prior consent not required by law rules and regulation. - DFSA obtains prior consent of the home country supervisor as manifested in internal procedures and consistent with Article 12 of Directive 2000/12/EC. - DFSA has authority to revoke a license under Section 224/1; can revoke invalid administrative decisions if supporting information was knowingly false; DFSA can punish bank management for furnishing wrong information. Assessment: Largely compliant. Comments: - Rules and regulations are largely based on relevant EU directives. - Assessment of beneficial owner suitability, transparency of ownership structure, and source of initial capital is only required by law or rules indirectly; greater clarification desirable. - Fit and proper test covers members of Board of directors and Board of managers; an assessment at least of remaining senior management might be useful. - For foreign banks establishing a branch or subsidiary, prior consent (or a statement of “no objection”) of the home supervisor is not required formally by law rules and regulation. ### Principle 4 — Ownership Description and findings: - A direct or indirect holding representing 10 percent or more of share capital or votes is deemed a qualifying interest (Section 5/3 of the FBA). - Section 61/1 requires prior notification and authorization to acquire a qualifying holding of 10 percent or more or to increase holdings so they exceed 20 percent, 33 percent, 50 percent, or so that the bank becomes controlled by that person. - Section 61/2: acquisition or increase of such interests shall only be approved when approval is not contrary to ensuring appropriate operation of the bank. - Owners intending to reduce interests below thresholds must notify DFSA and state the size of intended future interest (Subsection 6). - Prior notification required for acquisitions or reductions of qualifying interests in foreign financial undertakings with specified thresholds (20 percent, 33 percent, 50 percent). - Section 61/1 gives DFSA right to refuse authorization for acquisition or increase of qualifying holdings; authorization can be withdrawn indirectly if shareholder activities cause significant risk to sound and prudent management. - Under Section 62/1 DFSA may order the bank to follow guidelines and withdraw voting rights associated with relevant holdings; exercise of voting rights by significant shareholders without DFSA approval may be suspended. - Section 61/8: banks shall, no later than February each year, submit information to the DFSA of the names of owners of capital who own qualifying interests and sizes of those interests. Assessment: Compliant. Comments: - No formal process to identify beneficial owners where they differ from shareholders of record (though in practice not proved a difficulty). - A clearly defined list of measures or corrective actions for the supervisor should be included in the FBA or an executive order to ensure transparent ownership or disqualify unsuitable shareholders. - DFSA should be obliged to consult in every case with the home supervisor before granting authorization for acquisition of significant participation in a bank by a foreign credit institution or parent undertaking. ### Principle 5 — Investment Criteria Description and findings: - Generally, FBA imposes no specific structural conditions or restrictions on banks engaging in securities activities or insurance business. - FBA Sections 145, 146, and 147 specify how and within which limits banks and mortgage-credit institutions can place their funds; DFSA can exempt from specific limits. - FBA Section 180: DFSA can order banks and mortgage-credit institutions to dispose of holdings in other financial undertakings. - FBA Section 182: banks and mortgage-credit institutions cannot, without DFSA approval, have exposures within the same group except rules covering exposures with subsidiaries. - Section 146/1: holdings in other companies held by banks may not exceed 100 percent of the base capital. Base capital defined in FBA Section 128 as reduced core and additional capital after standard deductions. - DFSA may grant exemptions from Section 146/1 per Section 146/4. - Section 139/5 and 6: excess of any single investment above 15 percent of liable capital and the sum of these investments above 60 percent of the liable capital would be deducted from liable capital; applies also on a consolidated basis. - Generally, banks required to notify DFSA in advance of an acquisition or investment; Section 145/3 exposures amounting to 10 percent or more of base capital shall be notified to DFSA each quarter. - Section 25: banks may temporarily carry out other activities to secure or phase out exposures, or for restructuring enterprises, with DFSA informed. - Additional limits: - Banks may not own real property or acquire holdings in property companies amounting to more than 20 percent of the base capital. - A bank may not have a residual risk under leasing agreements the value of which, together with real property and holdings covered by Section 147 of the FBA, amounts to more than 25 percent of the base capital. - Special regulation for mortgage-credit institutions: per Section 153/1 mortgage-credit institutions shall place funds corresponding to no less than 60 percent of their base capital in specified assets. - FBA or regulations do not provide formal criteria to judge individual proposals. - Acquisition of a qualifying holding in a credit institution by another credit institution governed by general rules on acquisition of qualifying holdings; DFSA requires applicant be in a sound financial situation and that acquisition will not complicate supervision. Assessment: Largely compliant. Comments: - FBA does not require prior approval of investments in non-financial companies and consequently no formal criteria to judge individual proposals. ### Principle 6 — Capital Adequacy (introductory material) Description: - The FBA along with the: - EO on Capital Adequacy, and - Guidelines on Solvency Need vested in it under that legislation, apply to all banks operating within Denmark. - The principles applicable to banks, together with capital requirements for banks laid down in [text ends here in the source]. Italic: IMF staff content: _cr07118 - Section 354/5 (which deals with matters being considered by the Company Appeals Board). If_ ### Part 10 of the FBA. The provisions contain a specification of: ### _cr07118 - Part 10 of the FBA. The provisions contain a specification of: ### Capital structure, eligible components, and deductions - Eligible components of capital are set out in FBA Section 128. - Hybrid core capital under Subsection (1), no. 7, shall be no more than 15 percent of the core capital after the deductions mentioned in Section 131. - The additional capital shall not be included with more than 100 percent of the core capital after deductions. - Holdings in credit institutions or finance institutions shall not be deducted from the base capital when the holdings are acquired temporarily, and the acquisition takes place as part of a reconstruction. - Holdings in credit institutions and finance institutions that are included in consolidation shall not be deducted from the base capital. This is also applied to subordinated capital injections in credit institutions and finance institutions covered by the consolidation (options with regard to the EU Banking Directive). - Denmark has implemented Directive 2000/12/EC and Directive 93/6/EEC; requirements are broadly consistent with the Basel Capital Accord. ### Minimum paid-in capital and solvency requirement - FBA Section 124: paid in share capital of a bank to be established shall be at least €5 million. - FBA Section 124: base capital (capital) of banks and mortgage-credit institutions shall constitute no less than 8 percent of the risk-weighted items (the solvency requirement). This capital ratio should be maintained at all times. - For mortgage-credit institutions, the solvency requirement shall be met for both the individual series of bonds with serial reserve fund and for the institution in general. - The DFSA has the right to establish a higher rate of capital adequacy (Section 124/4 of the FBA). - Under Sections 170/ and 172/2 of the FBA, capital adequacy ratios are to be calculated on both a consolidated and a solo basis for banking entities within a banking group. - The solvency ratio requirement shall also apply to bank holding companies. - The required capital ratio is based on the risk profile of individual banks, in particular credit risk and market risks. - Section 142: risk-weighted items according to section 124 shall mean items with a credit risk, share price exposure, interest rate risk, currency risk, and commodities risk; risk-weighted items comprise both on-balance-sheet and off-balance-sheet items. ### Reporting, supervision, and enforcement - Banks must report their capital adequacy ratio solo and for the consolidated group quarterly. - Very small banks with a so-called ‘employed’ capital of less than DKr 250 million shall only report capital ratios and their components every half year. - Section 75/3: the DFSA has to be informed immediately whenever capital requirements are not met. - FBA Section 225/1: if the bank does not meet the capital requirements mentioned and if the bank has not raised the capital required prior to the time limit set by the DFSA, the DFSA shall withdraw the license. - The DFSA has the right to enforce sanctions for violations of the provisions of the FBA on capital adequacy. - Assessment: Compliant. - Comment: DFSA may impose an individual solvency requirement under Section 124/4, usually after an on-site inspection. DFSA has not issued detailed guidelines on required actions when capital falls below minimum requirements, though guidelines might be helpful. ### Credit policies (Principle 7) - FBA Sections 70 and 71(1): Board of Directors shall prepare written guidelines and procedures on the most significant areas of activity. - DFSA-issued guidelines require areas of responsibility to be clearly defined and indicate how banks should calculate risks in specific credit exposures and value collateral prudently. - Board responsibilities: define authority to grant credit; indicate which credit activities are reserved to the board; require periodic reporting from board of management to board of directors covering total credit exposure, largest exposures, sectoral/product/geographical breakdowns, and portfolio quality indicators. - Board must review credit policies at least annually, including extent of any connected lending. - Guidelines require separation of credit-granting authority and control of credit exposures; banks must have written guidelines communicated to staff. - DFSA inspects credit policy, granting procedures, organization, valuation of collateral, monitoring arrangements, impairment recognition, provisioning, and write-offs; DFSA can order replacement of management for persistent weaknesses. - Assessment: Compliant. ### Loan evaluation and loan-loss provisioning (Principle 8) - DFSA does not lay down detailed rules for asset quality classification and provisioning but requires boards to set specific policies for problem credits. - Valuations are based on accounting principles for banks derived from EU Accounting Directives; from January 2005 these are based on IFRS, including IAS No. 39. - Provisions specified in EO on Financial Reports for Credit Institutions and Investment Companies (under FBA Section 196). - EO requires external auditors to state whether valuations reflect best estimates of realizable value; EO on large exposures includes guarantees and contingent liabilities in exposures. - Guidelines under FBA Section 71: banks must have policies authorizing writing-off losses on lending and guarantees. - Section 52 of EO: banks shall at each balance sheet date recognize any objective evidence of impairment as defined in IAS No. 39. - FBA Section 344: DFSA may order a bank to change the level of provisions to ensure recognition of all evidence of impairment. - Reporting: banks required to report asset quality and associated provisions quarterly and annually, including largest accumulated impairments and the ten largest losses during the year. - From end-2005, banks required to report exposures where objective evidence of weakness is not sufficient to justify raising a provision but which management considers a weak exposure. - Assessment: Compliant. - Comment: DFSA relies on IAS No. 39 tests rather than mechanical arrears rules; banks must report loans with missed scheduled payments. Some banks released provisions deemed not based on objective evidence; DFSA requested reporting of such loans. ### Large exposure limits (Principle 9) - Exposures to single borrowers include connected customers per EU Directive 2000/12/EC test. - EO on Large Exposures: all exposures, including off-balance-sheet, before deduction of any provision, in excess of 10 percent of base capital must be reported quarterly; requirements apply at bank level and consolidated basis. - EO and FBA Section 71: banks must have board-approved policies to monitor and control large exposures; implementation assessed on-site. - EO on Auditing Financial Undertakings: internal and external auditors must ensure exposures in excess of 10 percent of base capital are identified and reported to the board and DFSA. - FBA Section 145(3): exposures may not exceed 25 percent of base capital after deduction of certain defined types of very high quality collateral; any excess must be reported immediately. - Temporary excesses permitted only in special circumstances. - Total of all exposures in excess of 10 percent of capital must not exceed 800 percent of base capital. - Assessment: Compliant. - Comment: DFSA receives only annual sectoral breakdown; relies on auditors between inspections and has found auditor verification sometimes insufficient to detect credit concentrations. ### Connected lending (Principle 10) - FBA Section 78: all exposures to members of boards, management, related undertakings, close relations, or employees must be approved by the board; the FBA defines related companies and individuals. - November 2005 bill: amend FBA Section 78(4) to treat cohabitants as married persons for these rules. - FBA Section 78(2): such transactions must be on the bank's usual business terms and conditions; applies to all transactions regardless of size. - FBA Section 181 and EO on Intra-group Transactions: detailed rules and board-approved guidelines required; transactions with director/management must be discussed in their absence and recorded in minutes; such exposures must be reported to the board, discussed at least annually, and included in published financial statements. - External auditors review intra-group transactions per EO on Intra-group Transactions. - Banks must obtain prior DFSA approval for all intra-group exposures. - Without prior approval, Credit Institutions Directive could permit intra-group exposures up to 20 percent of base capital with 20 percent risk-weight. - Danish rule: banks normally allowed intra-group exposures up to 25 percent of the minimum solvency requirement in addition to surplus capital; such exposures are weighted at 50 percent. - Intra-group exposures may not exceed 100 percent of base capital. - Assessment: Largely compliant. - Comments: DFSA cannot deem connections beyond those specified in law; high intra-group limits (up to 100 percent of base capital) can exist to permit group functioning; DFSA should consider discretionary power to judge existence of connections or require collateralization. ### Country risk (Principle 11) - Significant country risk relevant for major banks; guidelines under FBA Section 71 require board-approved credit policies including country risk. - Banks adopt policies for assessing country exposure quality and provisioning; reviewed by external auditors and assessed by DFSA on-site. - Assessment: Compliant. - Comment: No routine country-by-country reporting requirement; DFSA reviews exposures during on-site inspections and may require ad hoc reporting. ### Market risk (Principle 12) - Guidelines under FBA Section 71 (Section 3) require board-approved systems to measure, monitor, and control market risks covering organization, authorities, procedures, internal controls, reporting systems, and computer systems. - Banks must have board-approved policies setting desired risk profile and limits on positions and counterparties; policies to include detailed methods of calculating exposures and positions subject to limits. - Limits should cover foreign exchange, interest rate risk, and derivatives; trading activity defined broadly to include all business in marketable securities. - Trading activity subject to EU directive limitations and conforms with Basel Capital Accord and the Market Risk Amendment. - FBA Section 142 empowers DFSA to establish capital charges on market risk; detailed in EO on Capital Adequacy Part 3 and Annex 2. - Assessment: (Text ends mid-sentence in source.) *Source: _cr07118 - Part 10 of the FBA. The provisions contain a specification of:* ### Section 124 (4) to impose higher minimum solvency requirements on specific banks that might ### _cr07118 - Section 124 (4) to impose higher minimum solvency requirements on specific banks that might ### Market risk supervision and internal models - DFSA verifies during on-site examinations that banks have the necessary information systems, risk management systems, and internal controls to ensure that all transactions are captured on a timely basis. - DFSA verifies that limits are adhered to and that positions are correctly valued. - Those banks authorized to use internal models (so far only three) are required to perform scenario analysis and stress testing techniques. - Typically, models are approved for periods of one year only and are then the assumptions are tested and their suitability reviewed before any subsequent approval. - DFSA experiences difficulties in hiring and retaining skilled personnel in this area but so far have been able to supervise the few banks active in market risks. - DFSA has established a Credit and Market Risk Division responsible for supervising the major banks and providing assistance to smaller banks and other financial entities when required. - On-site inspections review reports made to senior managements and boards to ensure risks are properly understood, discussed by the boards, and appropriately minuted. - Assessment Compliant. - Comments: Resources available to the DFSA in this area are limited. At this stage the number of banks and other institutions undertaking very sophisticated market risk trading is reportedly limited. Much of the Nordea Group’s trading activities is undertaken in Copenhagen and under its proposed re-organization plan this activity will become the responsibility of the Swedish supervisory authority. ### Principle 13 — Other Risks (description, assessment, comments) - FBA Section 70 requires banks to have written policies on all significant areas of business. - Guidelines under FBA Section 71 specify coverage including overall exposure to interest rate risk (trading book and other activities) and aspects of operational risk. - Policies should cover the use of derivative instruments to hedge positions in foreign exchange and interest rate exposure. - FBA Section 152 requires banks to observe a stock liquidity requirement: 15 percent of liabilities maturing within one month, and 10 percent of all liabilities, are covered by holdings of specified liquid assets. Observance reported at the end of each quarter. - Mortgage banks subject to tight liquidity restrictions according to the ‘balance’ principle, reporting quarterly to the DFSA. - Foreign exchange liquidity management practices assessed during on-site inspections and subject to periodic stress-testing. - DFSA has not issued minimum requirements in respect of other risks but requires banks to establish their own risk parameters; on-site inspections ensure they are observed. - IFRS will require banks to include in their published accounts a statement of the bank's risk appetite and use made of it. - DFSA has powers to impose additional capital requirements if overall risk is not adequately addressed by existing minimum requirement. - Extent of risk reporting covered by the EO on Financial Reports for Credit Institutions, which is based on IFRS. - Assessment Largely compliant. - Comments: Policies required to cover internal audit, procedures to counter fraud, business recovery plans, and other elements of operational risk. Policies in respect of liquidity are required, but there is no routine requirement for monitoring and reporting to the DFSA of changes in net funding requirements, stress testing, and contingency planning for liquidity crises under various scenarios. Historically, DFSA required major and selected banks to report weekly or monthly liquidity tables showing worst case scenarios (beginning of the 1990s). ### Principle 14 — Internal Control and Audit (description, assessment, comments) - Companies Act Section 54: board of directors and board of management responsible for company management. - FBA Section 65: board of directors must lay down detailed procedures for performance of duties. - New board members obliged to establish they are ‘fit and proper’; evaluated by the DFSA. - DFSA verifies quality of boards during on-site inspections. - FBA Section 70 and guidelines under FBA Section 71 require banks to have detailed policies for all significant areas of business including internal controls. - FBA Section 64 sets out minimum standards to ensure directors are fit and proper; FBA Section 64 (2) 4 disqualifies persons presumed unable to fulfill responsibilities adequately. - DFSA power (FBA Section 351) to remove a member of the board of management; DFSA assesses quality and capacity of board members during on-site inspections. - EO on Auditing Financial Undertakings and Financial Groups lays down requirements for internal and external audit of banks. - All banks, except very small institutions, required to have a professionally qualified internal auditor reporting directly to the board of directors; internal auditor’s reports must be made available to the DFSA and inspectors meet with him during on-site inspections. - Assessment Largely compliant. - Comments: DFSA has no specific powers to require removal of a member of the board of directors (may withdraw the license if board does not fulfill functions). No explicit 'fit and proper' requirement for members of senior management other than board of management (often limited to CEO and deputy), nor for internal auditor and others responsible for internal controls and risk management. Under bicameral Danish corporate governance management excluded from board membership; internal auditors report to the board as a whole. DFSA evaluates board effectiveness as a whole but does not assess individual members nor have powers to require board composition changes short of license withdrawal. Guideline 9680 does not define clearly enough Finanstilsynet requirements in internal control; guideline does not expand on section 71 FBA and subsequent control procedure may not cover all relevant issues. The importance of the function requires an executive order. ### Principle 15 — Money Laundering (description, assessment, comments) - FBA Section 43 requires banks operate in accordance with honest business practices; expanded in the EO on Good Business Practice for Financial Undertakings. - Act on Measures to Prevent AMLCFT applies to all banks and implements the 2001 EU directive. - The Act requires banks to have appropriate internal controls, training programs, customer identification systems, means for identifying parties who are not customers, and procedures to recognize suspicious and unusual transactions. - Bankers Association (Finansrådet) guidelines establish a system of responsibilities for detecting, investigating, and reporting suspicious transactions to the Public Prosecutor for Serious Economic Crimes; steps should be taken to suspend the transaction meanwhile if possible. - DFSA's internal inspection manual requires inspectors to cover these areas during on-site inspections. - FBA Section 75 requires banks to report to the DFSA transactions of material significance to the continued operation of the bank. - Money Laundering Act states bank employees will not be liable for breach of normal confidentiality rules if they report suspicious transactions. - DFSA verifies these requirements during on-site inspections. - FBA Section 354 empowers DFSA to pass information to other supervisory authorities, Danmarks Nationalbank, and judicial authorities; no legal problems experienced in sharing information. - No explicit requirement that banks have a statement on ethics, but banks and their directors and employees are bound by the EO referred to above. - Assessment Largely compliant - Comments: A new law recently passed gives a statutory basis to some areas covered by Finansrådet’s guidelines (for instance the reporting hierarchy) and enacts the 2003 revisions to the FATF recommendations. For many small banks, on-site inspections (including AML provisions) take place relatively infrequently. ### Principle 16 — On-Site and Off-Site Supervision (description, assessment, comments) - FBA Section 344 (9) gives DFSA responsibility to supervise banks, authorize DFSA to obtain information, obligate banks to provide it, enter bank premises, and carry out examinations. - Act requires banks to furnish periodic reports of condition and other matters. - DFSA appoints an 'accountable officer' (AO) for each bank, responsible to the Director-General for supervision of the bank. - On-site inspections scheduled by DFSA; AO ensures remedial action detected is undertaken within specified timetable. On-site inspections carried out by teams of at least two persons. - DFSA organized partly on a functional basis; Banking Division inspections can be assisted by Credit and Markets Risk Division, Economic, Statistics and IT Supervision Division, or Mortgage Credit Division as needed. - Resulting report sent to bank; report focuses on bank's risk profile and compares with peers; report annexed to internal AO report that assesses bank’s risk profile, risk management, and accords a rating. - Supervisory program for larger banks covers a four year period; examinations take place at least once a year, concentrating on high priority aspects while covering all significant risks over the cycle. - Smaller banks generally inspected once every four years; very small and low risk institutions normally visited once in seven years. - Foreign banks also inspected, often in conjunction with home supervisors. - Off-site supervision based on quarterly and annual statistical reports aligned with banks' financial statements (IFRS, especially IAS No. 39). - Reports examined to detect validation errors and identify outliers; summary statistics published on DFSA's web site, broken down by four main groups of banks. - Banks with rapid credit growth or high interest rate and share price risk are asked for explanations; each bank rated annually on a scale of 1–9 (1–3 being vulnerable and 4 being borderline) and subjected to stress tests. - AO compares on-site and off-site ratings; combined information influences inspection frequency and supervisory actions; process updated mid-year. - External auditors provide 'management letter' or 'long form report' as input to supervisory process; internal auditors' reports also used; on-site teams meet internal and external auditors during inspections. - Assessment Compliant. - Comments: On-site and off-site work well integrated; DFSA relatively small agency. Visits to low risk institutions are relatively infrequent (most banks inspected once in four years, very small institutions less frequently). Inspection teams modest in size. Government response to National Audit Office criticisms likely to address resources and risk-proportional allocation. ### Principle 17 — Bank Management Contact (description, assessment, comments) - DFSA holds a formal meeting annually with the largest five banking groups, normally just after annual financial statements, to cover strategic issues. - Supervisors meet separately with middle management of major banks several times during the year. - For other banks, meetings held with board and management at time of on-site inspections; vulnerable banks (rating 3 or lower) may be inspected yearly and meet more frequently. - Banks required under FBA Section 75 to notify DFSA of any matters of material significance to continued operation; obligation attaches to individual board and management members as well as the bank. - If any director or management board member believes the bank no longer complies with legal obligations under the FBA, he/she must immediately inform the DFSA; similarly if any board member ceases to be 'fit and proper' DFSA must be informed. - DFSA assesses management quality during on-site inspections and as part of annual rating process based on off-site supervision and auditor comments. - Assessment Largely compliant. - Comments: Regular meetings with management at all levels occur only for the five largest banking groups and with low rated banks inspected annually. DFSA meets management of other banks at on-site inspections which may be infrequent unless either side requests meetings. Planned staff expansion may increase frequency of meetings with low risk banks. ### Principle 18 — Off-Site Supervision (description, assessment) - DFSA powers under FBA Section 347 to obtain information from licensed institutions, including branches of foreign banks; DFSA can access bank premises on proof of identity. - DFSA requires banks to complete quarterly and annual returns on a solo and consolidated basis. - DFSA power under FBA Section 198 to set out accounting principles; from 2005 these comply with IFRS and EU accounting regulations. - DFSA specifies time limits for furnishing information and can fine banks failing to meet deadlines; inaccurate reporting can lead to fines under FBA Section 374. - Information required includes balance sheet and income statements, asset quality and provisioning, details of specific large exposures, off-balance sheet items, etc. - DFSA arranges information by groups of institutions; compiles ratios and indicators as part of an early warning system; identifies outliers and takes supervisory action. - For vulnerable banks more frequent information collected (e.g., liquidity) sometimes as often as on a daily basis. - DFSA receives annual 'long form' reports from external auditors and similar reports from internal audit. - Assessment Compliant. ### Principle 19 — Validation of Supervisory Information (description, assessment, comments) - Supervisory information normally validated by Economics, Statistics, and IT Supervision Division via statistical tests to detect errors. - Fundamental accuracy ensured during on-site inspections; DFSA has unfettered right of access to information and personnel. - External auditors play a role (e.g., solvency ratio included in published financial statements and audited). - DFSA inspectors meet with both internal and external auditors during on-site inspections; auditors’ reports copied to DFSA help ensure accuracy. - DFSA power (FBA Section 199) to dismiss an external auditor, appoint a second auditor where concerns exist, and commission an extraordinary audit at the bank's expense; used where doubts on adequacy of loan-loss provisions. - Where an external or internal auditor resigns, both auditor and bank required to provide a written explanation. - Assessment Largely compliant. - Comments: On-site inspections may be infrequent; during intervals DFSA relies on external auditors to ensure accuracy. Although some information is audited and auditors must report to the DFSA, there is no program of annual meetings with auditors to discuss audit results. DFSA frequently corresponds with auditors; some meetings held by DFSA staff responsible for accounting matters, but supervisors of specific institutions are not normally involved. ### Principle 20 — Consolidated Supervision (description, assessment, comments) - DFSA has authority to conduct consolidated supervision of banking groups, including groups where parent is a holding company. - Process facilitated by DFSA supervising all financial institutions; FBA Sections 25 and 26 constrain banks from active management interest in non-financial business. - FBA Section 170-2 ensures prudential requirements apply to whole group as well as individual licensed institutions. - Where unsupervised entities are involved, parent institutions responsible for ensuring DFSA requirements are met (including outsourced activities). - DFSA has signed MoUs and made arrangements to be informed about subsidiaries and affiliates outside its jurisdiction. - FBA Section 14 states a bank will not be licensed, or license could be withdrawn (FBA Section 224), if associated with a business in such a way as to make it difficult to supervise the bank or group. - DFSA cannot obtain information directly from non-licensed companies but can require licensed entity to supply that information. - Assessment Compliant. - Comments: DFSA has effective arrangements with other supervisory authorities in the region to ensure consolidated supervision of major banking groups. For domestic Danish banks few significant consolidation issues arise due to integrated supervision. Expertise on consolidation issues lies with the Mortgage Credit and Investment Companies Division where mortgage banks are owned by or own commercial banks. ### Principle 21 — Accounting Standards (description, assessment, comments) - FBA Section 71 and DFSA guidelines require banks to have good accounting systems. - DFSA can specify accounting arrangements consistent with IFRS from 2005 as required by EU regulations. - Published financial statements must be audited per these accounting standards and additional DFSA requirements (FBA Section 188 lists these requirements). - Board of Directors responsible for maintaining adequate records and approving written arrangements for compiling and maintenance of records. - Board appoints external auditors who must meet requirements under FBA Section 199; DFSA may dismiss auditor or appoint second auditor. - EO on Auditing Financial Undertakings and Financial groups specifies auditor work areas including asset quality, valuation of securities and other assets, trading activities including derivatives, and adequacy of internal controls. - On-site inspections verify accuracy of statistical reporting and published financial statements; DFSA meets with external auditors at on-site inspections. - Auditors (including internal auditors) have legal obligation under FBA Section 200 to report to the DFSA matters of material importance to continued operation of the bank observed during audit; obligation extends to matters in closely linked businesses. - Assessment Compliant. - Comments: In adapting to IFRS, some major banks have written back into income provisions made against loan losses, which are not justified under IAS no. 39. This excess provisioning may reflect prudence or tax deferral motives. DFSA is contemplating using its powers to raise capital requirements for individual banks to make offsetting adjustments to avoid banks operating with smaller cushions. ### Principle 22 — Remedial Measures (description) - DFSA has a range of sanctions from oral and written comments to revocation of license. - “Bill of health” (order under FBA Section 349) used in early deterioration stages to require a stress test to determine what it would take to breach minimum solvency requirement; typically used for marginally rated banks. - DFSA can issue time-bound orders under FBA Section 350 where depositors' interests are at risk; orders could require capital increases by a specified date. Failure to meet deadline grounds for revocation of license. - DFSA can remove a member of the board of management, criticize a specific function and require board measures, order restriction of certain activities (e.g., new lending). - In serious cases DFSA may order suspension of payments under FBA Section 238 effectively freezing the business and appoint a 'supervisor' or conservator. - DFSA may petition courts under FBA Section 234 to commence liquidation and revoke license. - For minor reporting failures DFSA can levy fines; in more serious cases DFSA can refer infractions to police who may initiate prosecutions resulting in fines or prison sentences of up to four months. - Although normally sanctions are not publicized, FBA ... *Source: _cr07118 - Section 124 (4) to impose higher minimum solvency requirements on specific banks that might (IMF PDF).* ### Section 54A does give the DFSA the authority to publicize action taken against banks in certain ### Section 54A does give the DFSA the authority to publicize action taken against banks in certain ### Remedial powers, sanctions, and enforcement procedures - Section 54A: DFSA has the authority to publicize action taken against banks in specified instances. - DFSA power: impose sanctions if a bank takes any action likely to imperil the interests of depositors. - Remedial actions arising from on-site inspections and other forms of supervision are addressed to the board of directors in writing. - Directors are required to sign that they have received the document; DFSA ensures actions are taken within the time limits specified. - Failure to comply with remedial actions within specified time limits is grounds for revocation of the license. - Assessment: Largely compliant. - Comments: - DFSA's powers to remove individuals are limited: a member of the management board may be removed but key management (e.g., chief financial officers) often are not board members and may not be removable directly. - DFSA can require the board to take remedial action in respect of a specific function, which may involve management changes. - No statutory "prompt corrective action" procedures; recent changes to the sanction framework enable DFSA to take action earlier than "Prompt Corrective Action" measures would typically require. - No explicit powers to restrict dividend payments; however, if such payments would clearly damage depositors’ interests, DFSA would have grounds to act and could prevent payments. - DFSA’s performance contract with the government requires prompt response to problems and internal time limits for processing cases. ### Principle 23 — Globally Consolidated Supervision (Description and Practice) - Legal basis: Part 12 of the FBA provides DFSA with means to conduct supervision of banks on a consolidated basis. - Branch establishment notification requirements under Section 38/1 of the FBA include: - the country in which the branch is to be established; - a description of the activities of the branch, including information on organization and planned activities; - the address of the branch; and - the names of the branch management. - Sections 170–172: regulations regarding solvency, large exposures, holdings in other companies, holdings in real property, leasing agreements, loans for share capital, liquidity, and exposures within the same group shall apply to the group; the parent undertaking shall ensure compliance. - Reporting and access: - DFSA receives quarterly reports on solo and group basis. - Bank and banking subsidiaries must provide access to DFSA inspectors and cooperate, including foreign entities of Danish banks. - Licensing for branches/subsidiaries outside EU: - Section 38/7 and Section 40/1/2: banks must notify and have a license by the DFSA to establish a branch or subsidiary in a country outside the EU without a Community financial area agreement. - DFSA may reject license if administrative structure or financial situation is doubtful. - Overseas supervision: - Overseas activities regarded as significant risk area. - Major banking groups’ overseas entities inspected as part of special inspection program; DFSA undertakes regular on-site inspections abroad and receives regular reports. - FBA affords DFSA authority to supervise overseas activities of locally incorporated banks. - Oversight of foreign entities and management: - No explicit provision on oversight of foreign entities; fit and proper requirements for bank management apply to same extent as head office. - DFSA undertakes regular on-site inspections abroad and discusses overseas establishments during parent undertaking on-site inspections. - DFSA intensifies local oversight where foreign activities have higher risk profiles or are fundamentally different or remote. - DFSA maintains a regular dialogue with management to check monitoring. - Limitations: - DFSA can withdraw bank license but has no direct authority to require closing of overseas offices. - DFSA can require a bank to take any steps deemed necessary if a policy may threaten solvency or liquidity. - In regular meetings with local supervisors, DFSA assesses size and type of local supervision. - Assessment: Compliant. ### Principle 24 — Host Country Supervision (Description and Practice) - Cooperation and MoUs: - Proper supervision of foreign branches/subsidiaries and Danish banks' overseas subsidiaries requires close international cooperation, ideally based on MoUs. - DFSA has signed MoUs with several supervisory authorities and holds regular meetings, particularly in connection with on-site inspections. - Separate agreements exist regarding the banking sector with United Kingdom, France, Germany, Ireland, Netherlands, Hong Kong, the Scandinavian countries, Estonia, and Lithuania. - Informal understandings permit on-site inspections of foreign branches and exchange of information with host supervisors when no MoU exists. - DFSA has a common Nordic MoU with Sweden, Norway, Finland, and Iceland. - Since 2000, Nordic supervisory authorities operate a cooperation agreement on supervision of the Nordea Group; group-wide inspections in 2003 and 2004. - Information sharing under FBA (Sections 38, 39, 40): - DFSA empowered to provide information to host country supervisors concerning specific offices in host country and overall supervisory framework for the banking group. - DFSA cannot prohibit banks or affiliates from establishing operations in countries with secrecy laws or other regulations prohibiting necessary information flows; however, DFSA can withdraw a license if foreign legislation will complicate DFSA's tasks. - No problems with secrecy laws inside EU/EEA-area. - Assessment: Compliant. - Comments: - Recommendation that FBA should permit DFSA to prohibit establishment in secrecy-law jurisdictions and include a reciprocity clause, although not a barrier in practice so far. ### Principle 25 — Supervision Over Foreign Banks’ Establishments (Description and Practice) - Licensing and requirements: - Licensing process for foreign bank subsidiaries requires similar procedures as for domestic banks. - Section 30/4: DFSA must receive declaration that planned activities are covered by company’s home country license. - For credit institutions registered in an EU member state, application routed through home regulator with confirmation of valid authorization/license. - Equal regulatory requirements: - Foreign bank subsidiaries subject to similar regulatory requirements as other Danish banks; some activity restrictions (e.g., trade in money and credit instruments or E-banking) may differ. - For branches of banks from outside EU/EEA, DFSA retains full supervisory authority and imposes same requirements as domestic banks; presently no branches in Denmark from outside EU/EEA. - Liquidity supervision for EU/EEA branches: - FBA Section 344/2: DFSA shall supervise liquidity in branches of credit institutions licensed in another EU/EEA country in accordance with Directives. - Consolidated supervision and information sharing: - Within EU/EEA, home supervisors practice consolidated supervision in line with EU directives and MoUs, but it is not a specific condition for obtaining a banking license that the home supervisor practices consolidated global supervision. - Sharing of information inside EU/EEA is based on EU Banking Directive; confidential information from EEA countries may be shared only with express permission and for specified purposes. - Information exchange to supervisors outside EEA permitted only: - on the basis of an international co-operation agreement; and - provided recipients are subject to statutory duty of confidentiality corresponding to FBA and require information to perform their duties. - Inspections by foreign supervisors: - Section 346/4: DFSA may permit foreign financial supervisory authorities to carry out inspections at Danish branches of foreign banks after prior notification to DFSA. - For local branches and subsidiaries of foreign banks outside EU/EEA, DFSA has supervisory responsibility; no similar right of access in FBA for home country supervisors, but DFSA has not opposed such visits to date. - Limitations on advising home supervisors: - No specific FBA provision giving DFSA power to advise home supervisor of material remedial action taken. - Based on MoUs, host supervisor obliged to contact home supervisor if host takes remedial action towards a branch. - DFSA does not determine whether a foreign entity of a bank incorporated in Denmark is adequately supervised on a consolidated basis. - Assessment: Largely compliant. - Comments: - DFSA is not obliged to require approval (or no objection) from home supervisor before issuing a license. - DFSA does not assess whether home country supervisor practices consolidated global supervision; such requirements are helpful for global consolidated supervision but omission unlikely to hinder effective supervision as Danish banks generally have entities inside EEA. - For foreign banks from outside EU/EEA, DFSA has supervisory responsibility; DFSA does not advise home supervisors on material remedial action unless an MoU exists. ### Summary compliance snapshot (selected items from Table 2) - Principle 23 (Globally Consolidated Supervision): 57 percent Compliant; 37 percent Largely compliant; 7 percent Materially noncompliant. Number 30. - Principle 24 (Host Country Supervision): 68 percent Compliant; 19 percent Largely compliant; 10 percent Materially noncompliant; 3 percent Nonapplicable. Number 31. - Principle 25 (Supervision Over Foreign Banks’ Establishments): 64 percent Compliant; 24 percent Largely compliant; 10 percent Materially noncompliant; 2 percent Nonapplicable. Number 31. ### Recommended action plan (selection from Table 3) - Objectives CP 1.1: A law or provision formally establishing the DFSA is desirable to make the organization of financial supervision in Denmark more transparent. - Independence CP 1.2: The DFSA would have more flexibility, if it had its own budget. - Licensing Criteria CP 3 / Internal Control and Audit CP 14 / Remedial Measures CP 22: - The "fit and proper" test of the DFSA should ideally apply to holders of other key management positions. - It may be useful to develop the guidelines for internal controls to an executive order. - Investment Criteria CP 5: The FBA should require prior approval for investments in non financial companies. - Connected lending CP 10: DFSA should consider the need for a power to use its discretion to judge existence of connection between a bank and other parties. - Other Risks CP 13: In respect of liquidity, DFSA should consider introducing routine monitoring of net funding requirements, stress testing, and contingency planning under various scenarios. - Bank Management Contact CP 17: DFSA should consider routine meetings with management of banks where on-site inspections are infrequent. - Supervision Over Foreign Banks’ Establishments CP 25: DFSA should consider how to assess the home country supervisory system when receiving an application from a bank from a country not represented in Denmark. ### Authorities’ response to the assessment (summary) - Broad agreement with IMF assessment, with some exceptions. - Consideration will be given to establishing DFSA as independent institution by providing a statutory basis and separating regulatory and supervisory budget; emphasis on ensuring adequate funds are available at all times. - Increased resources allocated as a consequence of the Capital Requirement Directive and the Third Money-Laundering Directive. - DFSA developing use of stress tests for monitoring soundness; building stress testing capacity would require increased resources. - Basel II implementation: - New Basel II capital requirements could result in potentially large decreases in minimum capital requirements for institutions applying internal rating based approaches and advanced measurement approaches. - Danish regulation includes floors that set the maximum decrease in capital requirements for institutions using the advanced methods in 2007, 2008, and 2009 in accordance with the EU Capital Requirement Directive. - DFSA can set additional capital requirements in individual cases where minimum capital requirements decrease in ways that do not reflect institution risks. - DFSA will consider issuing executive orders instead of guidelines in some cases, balancing benefits against administrative costs for supervised entities. - Fit & proper scope for key staff: DFSA cautious about extending to all key staff due to administrative burden and resource implications; benefits may not exceed costs. - Specific CP comments: - CP 5: DFSA has several criteria to judge proposals; not explicitly required by CP 5 to require prior approval for investments in non-financial companies. - CP 10: All connected lending is subject to limits in the FBA; DFSA does not see need for powers to deduct connected lending from capital or require collateralization. - CP 13: From 2007, banks required to hold capital against operational risks; DFSA plans to enhance liquidity supervision, stress testing, and contingency planning as part of Basel II implementation. - CP 17: Resources and risk-based supervision mean DFSA has regular meetings with senior management of major banking groups; vulnerable banks (rating of 3 or lower) are inspected yearly with meetings held. - CP 25: Danish banks generally only have banking entities inside European Economic Area; DFSA will consult other supervisory authorities, CEBS contacts, or the Group de Contact when necessary. *Source: IMF mission report section on DFSA powers, consolidated supervision, host country supervision, and supervision over foreign banks’ establishments.* --- _Source: https://www.imf.org/-/media/websites/imf/imported-full-text-pdf/external/pubs/ft/scr/2007/_cr07118.pdf_