## _wp1347

## Source details

**Canonical URL:** [_wp1347](https://www.imf.org/-/media/websites/imf/imported-full-text-pdf/external/pubs/ft/wp/2013/_wp1347.pdf)

## Other formats

- [Markdown version](/-/media/websites/imf/imported-full-text-pdf/external/pubs/ft/wp/2013/_wp1347.pdf.md)
- [Structured JSON version](/-/media/websites/imf/imported-full-text-pdf/external/pubs/ft/wp/2013/_wp1347.pdf.json)

---

### I. INTRODUCTION
- Objective: assess financial stability of Danish banks, analyze national policy initiatives, and identify additional policies to strengthen the banking system.
- Context: Danish banks affected by the global financial crisis, European crisis, and housing bust despite structural strengths (diversified economy, high income per capita, strong institutions, triple-A rating).

### II. FINANCIAL SOUNDNESS OF COMMERCIAL BANKS
- Structure and scale
  - Bank assets are over four times GDP.
  - Commercial banks are about 1.3 times the size of mortgage banks.
  - Sector highly concentrated: Group 1 banks account for 81 percent of commercial bank assets.
  - Danske accounts for over half of commercial bank assets; Nordea Denmark accounts for about 15 percent.
  - Number of banks: 106 as of mid-2012; trend of steady decline accelerated since the crisis.
- Profitability and efficiency
  - ROAA of Danish banks is about half the level of peers.
  - Cost-to-income ratio about 60 percent (on par with peers).
  - Sector profits mainly from Group 1 banks; rest of sector incurred fourth consecutive year of losses in 2011 and broke even in H1 2012.
- Asset quality and provisioning
  - Loan concentration: retail mortgages, commercial real estate, agriculture.
  - NPL ratio about three time that of peers.
  - Loan loss impairments as percent of loans and guarantees are much higher in small and medium sized banks than in large banks.
  - Reserves coverage of Danish banks is three times higher than peers.
- Capital and leverage
  - Core Tier 1 ratio of Danish banks is over 13 percent.
  - All four Danish banks passed the latest EU-wide capital exercise.
  - Group 1 banks strengthened capital via market issuance, capital injection, and foregoing dividends.
  - Group 2 banks’ capital buffers reduced due to losses and restrictions on including additional government capital.
  - Stringent ratios (e.g., TCE) show actual capital position weaker than regulatory ratios suggest due to hybrids and IRB risk weights; risk weights may underestimate actual risks.
- Liquidity and funding
  - Liquid assets account for about 35 percent of total assets.
  - All banks in Group 1 and Group 2 satisfy the “supervisory diamond” requirement of excess liquidity coverage greater than 50 percent.
  - Customer funding gaps have dropped: about 89 percent of banks have seen funding gaps narrowed.
  - Share of banks with loan-to-deposit ratio < 100 percent rose from 41 percent in 2008 to 80 percent in mid-2012.
  - Reliance on wholesale funding remains high; some banks face substantial short-term rollover needs.
- Cross-border exposures
  - Foreign claims represent 35 percent of total bank assets, or about 80 percent of GDP.
  - Predominantly exposed to European developed markets and the US: Sweden, the UK, Finland, Norway, and Ireland account for over 80 percent of total foreign claims.
  - Exposures to stressed European countries are small; exposure to emerging markets (e.g., Baltic countries) is insignificant.
- Bank rollover needs
  - Projected significant maturing liabilities across 2013–2022 with outflows by year and bank (Danske, Nordea Danmark, Others).

### III. FINANCIAL SOUNDNESS OF MORTGAGE BANKS
- Legal and operational features
  - Specialized institutions governed by special legislation; do not take deposits or access money market.
  - Loans granted only against mortgage on real property within lending limit of 60–80 percent.
  - Loans funded solely through issuance of covered bonds subject to balance principle; covered bond holders have preferential status.
- Performance
  - Mortgage lending has continued to increase; administration margins have increased and helped offset impairments and costs; mortgage banks remain profitable.
- Key risks
  - Top-up collateral requirement if market value decline leads to breach of LTV limits; top-up collateral can be capital, proceeds from issuing junior covered bonds, or guarantees meeting specific requirements.
  - Covered bonds issuance rose from 16 percent to 70 percent of outstanding mortgage bonds after 2007 legislation.
  - Increased need for top-up collateral due to sharply declining property values and stricter rating agency collateral requirements.
  - Refinancing risk: share of bonds maturing in less than one year almost doubled from 19 percent in 2008 to 37 percent recently.
  - Share of bonds with maturities shorter than adjustable-rate loans risen to 66 percent.
  - Refinancing of adjustable-rate loans concentrated at year-end; limited progress in spreading refinancing throughout the year for most banks.
- Industry adjustments
  - Mortgage banks have proposed business model changes to reduce top-up collateral and refinancing risks; DN notes pros and cons vary by loan size and bank group structure and calls for careful cost-benefit analysis.

### IV. COMMON ISSUES FOR COMMERCIAL AND MORTGAGE BANKS
- Household indebtedness and loan types
  - Denmark has the largest per-capita mortgage market in the world.
  - Households have the highest indebtedness in Europe with gross debt-to-income ratio of over 300 percent.
  - Decline in home equity to about 115 percent of disposable income.
  - Total after-tax net wealth (excluding mortgage loans) over disposable income fell to around 280 percent in 2011.
  - Deferred amortization loans surged from 19 percent in 2004 to 56 percent of outstanding debt for owner occupied homes recently.
  - Households with weaker balance sheets tend to use deferred amortization loans, though some use lower monthly payments to reduce other more expensive debt.
- Sectoral credit risks
  - Elevated risks in commercial real estate and agriculture lending.
  - Several small banks with large commercial property exposures failed since 2008.
  - High vacancy rates; ordinary sales of commercial properties plunged; enforced sales remained high in 2011.
  - Agriculture lending risks: increased borrower indebtedness, volatile earnings, reduced collateral values.
  - Majority of agricultural debt is variable-rate loans, which has surged to 89 percent of debt outstanding, increasing vulnerability to interest rate rises and refinancing risk.
- Regulatory treatment of covered bonds and liquidity
  - Basel III LCR proposal designates covered bonds as Level 2 assets with a 40 percent cap and haircut of at least 15 percent; sovereign bonds designated Level 1 and can make up 60 percent of buffer.
  - Danish mortgage covered bonds stand at 1.2 times mortgages outstanding and constitute 35 percent of banks’ funding sources.
  - Mortgage banks provide approximately two-thirds of total credit to Danish borrowers and are almost fully funded through covered bonds.
  - DN study: Danish covered bonds were very liquid during the crisis and subject to strict legal structure.
  - EC July 2012 proposal removed Basel III restrictions; EC listed criteria for LCR classification and asked EBA to refine them further by 2015.

### V. FINANCIAL POLICY INITIATIVES OF DENMARK
- Overall measures since the crisis
  - Capital injections, liquidity support, government guarantees, strengthened regulation and supervision, special resolution regime, deposit insurance reform, macroprudential institutional framework under consideration, SIFI committee report expected end-2012.
- Danmarks Nationalbank (DN) liquidity support measures
  - 2011: expanded collateral basis to include banks' credit claims of good quality; temporarily reopened option of pledging shares in jointly owned companies.
  - Introduced 6-month monetary policy loans offered monthly and 3-year term loans based on DN collateral base (available twice).
  - Usage:
    - 6-month facility drawn in February 2012 with total amount of DKK 0.1 billion.
    - 3-year loans first offered March 2012 with total borrowing of DKK 18.9 billion; offered again in September 2012 with DKK 37 billion.
  - Facilities intended to provide flexibility for banks to transition to viable long-run business models; available to all banks following a commercial assessment.
- Danish FSA “supervisory diamond” (introduced 2010, adjusted and phased in to end-2012)
  - Five limit values:
    - Sum of large exposures less than 125 percent of total capital;
    - Lending growth less than 20 percent per year;
    - Commercial property exposure less than 25 percent of total loans;
    - Stable funding less than 1;
    - Excess liquidity coverage greater than 50 percent.
  - After phase-in: FSA to implement systematic monitoring and laddered supervisory actions when breaches occur (stricter monitoring; risk information provision and immediate publication; account preparation and inspection; orders; publication on FSA website; possible increase in solvency need).
- Loan impairment rules
  - New rules on loan impairment charges introduced earlier in the year tightened range of impairments due to subjective judgment, increased impairments, and contributed to harmonization, transparency, and improved reporting quality.
- Resolution framework and Bank Rescue Packages
  - Denmark is first EU country to introduce resolution including bail-in framework.
  - Bank Rescue Packages 3–5 established, each tailored to different problems for smaller banks: failing banks, banks with guarantees, and banks with funding problems.
  - Bank Rescue Package 3 first used in 2011 for Amagerbanken, which triggered a senior debt loss.
  - Bank Rescue Package 4 introduced two models to create incentives for sound banks to take over distressed banks before Package 3 resolution required.
  - Bank Rescue Package 5 enabled establishment of an institution for funding the agricultural sector; established financing bank for agriculture to provide funding for farms and acquire viable agriculture exposures from the Financial Stability Company and other banks; allowed Financial Stability Company to take over FIH Erhvervsbank’s property exposures.
- Deposit insurance reform
  - Legislative amendment adopted requiring the bank department of the Guarantee Fund for Depositors and Investors to be funded ex ante.
  - Requires banks' contributions to the Fund's bank department to be funded at a fixed annual rate of 2.5 per thousand of the net deposits covered as October 1 in the previous year (about DKK 1.8 billion in March 2012).
  - The contribution obligation ends if the bank department's assets exceed one per cent of the net deposits covered (about DKK 7.5 billion).
  - The board of the fund may, or act at the order of the Danish FSA (in consultation with the DN), raise the annual contributions if warranted by the finances of the bank department.
  - The amendments entered into force in March.

### Funding of the Fund / Bank Department contributions
- Before the legislation, funding of the Fund was based on commitments from the banks, but only a minor share of the Fund's assets was contributed ex ante.
- The legislation requires banks' contributions to the Fund's bank department to be funded at a fixed annual rate of 2.5 per thousand of the net deposits covered as October 1 in the previous year (about DKK 1.8 billion in March 2012).
- The contribution obligation ends if the bank department's assets exceed one per cent of the net deposits covered (about DKK 7.5 billion).
- The board of the fund may, or act at the order of the Danish FSA (in consultation with the DN), raise the annual contributions if warranted by the finances of the bank department.

### Reform of institutional framework for macroprudential policy (Systemic Risk Council)
- Parliament expected to pass a proposal to establish a Systemic Risk Council in line with ESRB’s requirements.
- Mandate and role
  - Identify and monitor systemic risks in Denmark.
  - Communicate observations, warnings and recommendations to relevant parties, mainly the FSA, and the government in case of new legislation.
  - Play an advisory role; existing competences do not change.
  - Individual authorities consider and may act on recommendations.
  - If a recommendation is not followed, justification must be publicly explained in accordance with the comply-or-explain principle.
  - For confidential recommendations to ensure financial stability, the justification for not following would not be disclosed publicly but addressed solely to the council.
- Scope limitations
  - Address systemic risks within the financial area, but not developments in general economic policy (such as fiscal, tax, and monetary policy) and sector policy outside the financial area.
- Tools and resources
  - Will have at disposal a wide range of instruments allowed under the forthcoming CRD IV directive.
- Composition and governance
  - Two representatives from the DN (with the Chairman of the Board of Governors being chairman of the council).
  - Two representatives from the FSA.
  - Three representatives from the economic ministries.
  - Three independent external experts with special knowledge about financial matters.
  - The three economic ministries and the FSA do not have the right to vote, but merely the right to speak, in relation to observations, warnings and recommendations addressed to the government.
- Review and evaluation
  - The council will be evaluated within three years after the establishment, based on experience gained and international developments.
- Observations on design
  - The new setup represents an improvement over the existing one, but could be strengthened further with experience.
  - The council could benefit from well-defined coordination and information-sharing arrangements and concerned entities should have clear roles and responsibilities, consistent with their institutional mandates.

### Interagency committee on SIFIs
- Created early 2012 to develop prudential arrangements for SIFIs.
- Membership
  - Four independent members (including chairman).
  - One member each from the Ministry of Business and Growth, Ministry of Finance, DN, and FSA.
- Mandate and topics to consider
  - Clarify criteria to be met for a bank to be designated as a Danish SIFI.
  - Set requirements for SIFIs to ensure fair competition.
  - Identify instruments to be used for SIFIs with difficulties.
  - Consider whether:
    - (i) asset size is a good indicator in the Danish context;
    - (ii) additional requirements may cover capital, liquidity, recovery and resolutions plans, corporate governance, and supervision;
    - (iii) there is a possible need to complement the current Danish resolution framework with additional tools.
  - Take into account developments in international and EU regulations.
- Timing
  - Report its findings to the Ministry of Business and Growth by end-2012.
- Assessment
  - The creation of the committee is a positive step.
  - The potential inclusion of a bail-in framework would keep Denmark at the forefront of bank resolution regimes in the EU.

### Policy implications: banking sector vulnerabilities and recommended actions
- Progress and context
  - The banking sector has made progress in improving financial stability amid restructuring, consolidation, and adaptation to a new regulatory and supervisory environment.
  - Banks have shored up capital and liquidity base, partly achieved by support from the government and the DN.
- Key vulnerabilities
  - Profitability is weak.
  - Asset quality is low.
  - Capital buffers are not as robust as indicated by regulatory ratios; in some cases capital requirements are fulfilled by hybrids and low risk weights that do not reflect actual risks.
  - Heavy reliance on wholesale funding.
  - A small group of banks may have potential solvency problems.
  - Some smaller banks may have funding problems with the expiration of state guarantee in 2012 and 2013.
  - High indebtedness of borrowers implies small changes in debt service costs (such as an interest rate increase on variable-rate mortgages) and small decreases in income could amplify banks’ loan performance deterioration.
  - Certain mortgage products, such as deferred amortization mortgage loans, if used extensively by borrowers with weak balance sheets, could increase banks’ credit risks.
- Recommended bank-level actions
  - Continue to build more robust capital and liquidity buffers.
  - Enhance further the transparency of disclosures.
  - Use flexibility embedded in EU regulations to design strong prudential policies, treating Basel III and the CRD IV regulations as floors.
  - Reduce reliance on government and DN support over time given their time frames and constraints.
  - Banks that depend heavily on the DN lending facilities should seek a more sustainable funding structure by increasing deposits and lengthening maturities.
  - Boost capital organically by retaining earnings, restraining dividends, and raising equity.
  - Large banks would benefit from making regular disclosures regarding the new regulatory indicators, in particular loss absorbing capital and risk-weighted assets under Basel III once it is fully implemented.
  - Consider parallel calculation of risk-weighted assets under the standardized approach given large differences in risk weights between the Basel IRB and standardized approach.
- Recommended policy/regulatory measures
  - Phase out deferred-amortization mortgage loans gradually given their contribution to housing market volatility and potential to increase banks’ credit risks.
  - Reinforce deposit insurance; consider introducing risk-adjusted deposit insurance premia to encourage sound risk management and discourage risky behavior.

*Source: _wp1347 - References .............................................................................................................*

### References .............................................................................................................

### _wp1347 - References .............................................................................................................

### I. INTRODUCTION
- Objective: assess financial stability of Danish banks, analyze national policy initiatives, and identify additional policies to strengthen the banking system.
- Context: Danish banks affected by the global financial crisis, European crisis, and housing bust despite structural strengths (diversified economy, high income per capita, strong institutions, triple-A rating).

### II. FINANCIAL SOUNDNESS OF COMMERCIAL BANKS
- Structure and scale:
  - Bank assets are over four times GDP.
  - Commercial banks are about 1.3 times the size of mortgage banks.
  - Sector highly concentrated: Group 1 banks account for 81 percent of commercial bank assets.
  - Danske accounts for over half of commercial bank assets; Nordea Denmark accounts for about 15 percent.
  - Number of banks: 106 as of mid-2012; trend of steady decline accelerated since the crisis.
- Comparative indicators constructed vs. peers (Austria, Finland, France, Germany, the Netherlands, Norway, Sweden, Switzerland, UK): profitability (ROAA), efficiency (cost-to-income), regulatory capital (core Tier 1), leverage (TCE), asset quality (NPL), coverage (reserves relative to loan losses); indicators weighted by assets.
- Profitability and efficiency:
  - ROAA of Danish banks is about half the level of peers.
  - Cost-to-income ratio about 60 percent (on par with peers).
  - Sector profits mainly from Group 1 banks; rest of sector incurred fourth consecutive year of losses in 2011 and broke even in H1 2012.
- Asset quality and provisioning:
  - Loan concentration: retail mortgages, commercial real estate, agriculture.
  - NPL ratio about three time that of peers.
  - Loan loss impairments as percent of loans and guarantees are much higher in small and medium sized banks than in large banks.
  - Reserves coverage of Danish banks is three times higher than peers.
- Capital and leverage:
  - Core Tier 1 ratio of Danish banks is over 13 percent.
  - All four Danish banks passed the latest EU-wide capital exercise.
  - Group 1 banks strengthened capital via market issuance, capital injection, and foregoing dividends.
  - Group 2 banks’ capital buffers reduced due to losses and restrictions on including additional government capital.
  - Stringent ratios (e.g., TCE) show actual capital position weaker than regulatory ratios suggest due to hybrids and IRB risk weights; risk weights may underestimate actual risks.
- Liquidity and funding:
  - Liquid assets account for about 35 percent of total assets.
  - All banks in Group 1 and Group 2 satisfy the “supervisory diamond” requirement of excess liquidity coverage greater than 50 percent.
  - Customer funding gaps have dropped: about 89 percent of banks have seen funding gaps narrowed.
  - Share of banks with loan-to-deposit ratio < 100 percent rose from 41 percent in 2008 to 80 percent in mid-2012.
  - Reliance on wholesale funding remains high; some banks face substantial short-term rollover needs.
- Cross-border exposures:
  - Foreign claims represent 35 percent of total bank assets, or about 80 percent of GDP (Table 1).
  - Predominantly exposed to European developed markets and the US: Sweden, the UK, Finland, Norway, and Ireland account for over 80 percent of total foreign claims.
  - Exposures to stressed European countries are small; exposure to emerging markets (e.g., Baltic countries) is insignificant.
- Bank rollover needs (chart): projected outflows by year and bank (Danske, Nordea Danmark, Others) indicating significant maturing liabilities across 2013–2022.

### III. FINANCIAL SOUNDNESS OF MORTGAGE BANKS
- Legal and operational features:
  - Specialized institutions governed by special legislation; do not take deposits or access money market.
  - Loans granted only against mortgage on real property within lending limit of 60–80 percent.
  - Loans funded solely through issuance of covered bonds subject to balance principle; covered bond holders have preferential status.
- Performance:
  - Mortgage lending has continued to increase; administration margins have increased and helped offset impairments and costs; mortgage banks remain profitable.
- Risks:
  - Top-up collateral requirement if market value decline leads to breach of LTV limits; top-up collateral can be capital, proceeds from issuing junior covered bonds, or guarantees meeting specific requirements.
  - Covered bonds issuance rose from 16 percent to 70 percent of outstanding mortgage bonds after 2007 legislation.
  - Increased need for top-up collateral due to sharply declining property values and stricter rating agency collateral requirements.
  - Refinancing risk: share of bonds maturing in less than one year almost doubled from 19 percent in 2008 to 37 percent recently.
  - Share of bonds with maturities shorter than adjustable-rate loans risen to 66 percent.
  - Refinancing of adjustable-rate loans concentrated at year-end; limited progress in spreading refinancing throughout the year for most banks.
- Industry adjustments:
  - Mortgage banks have proposed business model changes to reduce top-up collateral and refinancing risks; DN notes pros and cons vary by loan size and bank group structure and calls for careful cost-benefit analysis.

### IV. COMMON ISSUES FOR COMMERCIAL AND MORTGAGE BANKS
- Household indebtedness and loan types:
  - Denmark has the largest per-capita mortgage market in the world.
  - Households have the highest indebtedness in Europe with gross debt-to-income ratio of over 300 percent.
  - Decline in home equity to about 115 percent of disposable income.
  - Total after-tax net wealth (excluding mortgage loans) over disposable income fell to around 280 percent in 2011.
  - Deferred amortization loans surged from 19 percent in 2004 to 56 percent of outstanding debt for owner occupied homes recently.
  - Households with weaker balance sheets tend to use deferred amortization loans, though some use lower monthly payments to reduce other more expensive debt.
- Sectoral credit risks:
  - Elevated risks in commercial real estate and agriculture lending.
  - Several small banks with large commercial property exposures failed since 2008.
  - High vacancy rates; ordinary sales of commercial properties plunged; enforced sales remained high in 2011.
  - Agriculture lending risks: increased borrower indebtedness, volatile earnings, reduced collateral values.
  - Majority of agricultural debt is variable-rate loans, which has surged to 89 percent of debt outstanding, increasing vulnerability to interest rate rises and refinancing risk.
- Regulatory treatment of covered bonds and liquidity:
  - Basel III LCR proposal designates covered bonds as Level 2 assets with a 40 percent cap and haircut of at least 15 percent; sovereign bonds designated Level 1 and can make up 60 percent of buffer.
  - Danish mortgage covered bonds stand at 1.2 times mortgages outstanding and constitute 35 percent of banks’ funding sources.
  - Mortgage banks provide approximately two-thirds of total credit to Danish borrowers and are almost fully funded through covered bonds.
  - DN study: Danish covered bonds were very liquid during the crisis and subject to strict legal structure.
  - EC July 2012 proposal removed Basel III restrictions; EC listed criteria for LCR classification and asked EBA to refine them further by 2015.

### V. FINANCIAL POLICY INITIATIVES OF DENMARK
- Overall measures since the crisis: capital injections, liquidity support, government guarantees, strengthened regulation and supervision, special resolution regime, deposit insurance reform, macroprudential institutional framework under consideration, SIFI committee report expected end-2012.
- Danmarks Nationalbank (DN) liquidity support measures:
  - 2011: expanded collateral basis to include banks' credit claims of good quality; temporarily reopened option of pledging shares in jointly owned companies.
  - Introduced 6-month monetary policy loans offered monthly and 3-year term loans based on DN collateral base (available twice).
  - Usage: 6-month facility drawn in February 2012 with total amount of DKK 0.1 billion.
  - 3-year loans first offered March 2012 with total borrowing of DKK 18.9 billion; offered again in September 2012 with DKK 37 billion.
  - Facilities intended to provide flexibility for banks to transition to viable long-run business models; available to all banks following a commercial assessment.
- Danish FSA “supervisory diamond” (introduced 2010, adjusted and phased in to end-2012):
  - Five limit values:
    - Sum of large exposures less than 125 percent of total capital;
    - Lending growth less than 20 percent per year;
    - Commercial property exposure less than 25 percent of total loans;
    - Stable funding less than 1;
    - Excess liquidity coverage greater than 50 percent.
  - After phase-in: FSA to implement systematic monitoring and laddered supervisory actions when breaches occur (stricter monitoring; risk information provision and immediate publication; account preparation and inspection; orders; publication on FSA website; possible increase in solvency need).
- Loan impairment rules:
  - New rules on loan impairment charges introduced earlier in the year tightened range of impairments due to subjective judgment, increased impairments, and contributed to harmonization, transparency, and improved reporting quality.
- Resolution framework and Bank Rescue Packages:
  - Denmark is first EU country to introduce resolution including bail-in framework.
  - Resolution regime established through “Bank Rescue Packages” 3–5, each tailored to different problems for smaller banks: failing banks, banks with guarantees, and banks with funding problems.
  - Bank Rescue Package 3 first used in 2011 for Amagerbanken, which triggered a senior debt loss.
  - Bank Rescue Package 4 introduced two models to create incentives for sound banks to take over distressed banks before Package 3 resolution required.
  - Bank Rescue Package 5 enabled establishment of an institution for funding the agricultural sector; established financing bank for agriculture to provide funding for farms and acquire viable agriculture exposures from the Financial Stability Company and other banks; allowed Financial Stability Company to take over FIH Erhvervsbank’s property exposures.
- Deposit insurance reform:
  - Legislative amendment adopted requiring the bank department of the Guarantee Fund for Depositors and Investors to be funded ex ante; amendment arises from political agreement on Bank Rescue Package 4 to ensure banks' contributions are more evenly distributed and predictable.
  - The amendments entered into force in March.

*Source: _wp1347 - References .............................................................................................................*

### 2012. Before the legislation, the funding of the Fund was based on commitments from the

### _wp1347 - 2012. Before the legislation, the funding of the Fund was based on commitments from the

### Funding of the Fund / Bank Department contributions
- Before the legislation, funding of the Fund was based on commitments from the banks, but only a minor share of the Fund's assets was contributed ex ante.
- The legislation requires banks' contributions to the Fund's bank department to be funded at a fixed annual rate of 2.5 per thousand of the net deposits covered as October 1 in the previous year (about DKK 1.8 billion in March 2012).
- The contribution obligation ends if the bank department's assets exceed one per cent of the net deposits covered (about DKK 7.5 billion).
- The board of the fund may, or act at the order of the Danish FSA (in consultation with the DN), raise the annual contributions if warranted by the finances of the bank department.

### Reform of institutional framework for macroprudential policy (Systemic Risk Council)
- Parliament expected to pass a proposal to establish a Systemic Risk Council in line with ESRB’s requirements.
- Mandate and role:
  - Identify and monitor systemic risks in Denmark.
  - Communicate observations, warnings and recommendations to relevant parties, mainly the FSA, and the government in case of new legislation.
  - Play an advisory role; existing competences do not change.
  - Individual authorities consider and may act on recommendations.
  - If a recommendation is not followed, justification must be publicly explained in accordance with the comply-or-explain principle.
  - For confidential recommendations to ensure financial stability, the justification for not following would not be disclosed publicly but addressed solely to the council.
- Scope limitations:
  - Address systemic risks within the financial area, but not developments in general economic policy (such as fiscal, tax, and monetary policy) and sector policy outside the financial area.
- Tools and resources:
  - Will have at disposal a wide range of instruments allowed under the forthcoming CRD IV directive.
- Composition and governance:
  - Two representatives from the DN (with the Chairman of the Board of Governors being chairman of the council).
  - Two representatives from the FSA.
  - Three representatives from the economic ministries.
  - Three independent external experts with special knowledge about financial matters.
  - The three economic ministries and the FSA do not have the right to vote, but merely the right to speak, in relation to observations, warnings and recommendations addressed to the government.
- Review and evaluation:
  - The council will be evaluated within three years after the establishment, based on experience gained and international developments.
- Observations on design:
  - The new setup represents an improvement over the existing one, but could be strengthened further with experience.
  - The council could benefit from well-defined coordination and information-sharing arrangements and concerned entities should have clear roles and responsibilities, consistent with their institutional mandates.

### Interagency committee on SIFIs
- Created early 2012 to develop prudential arrangements for SIFIs.
- Membership:
  - Four independent members (including chairman).
  - One member each from the Ministry of Business and Growth, Ministry of Finance, DN, and FSA.
- Mandate and topics to consider:
  - Clarify criteria to be met for a bank to be designated as a Danish SIFI.
  - Set requirements for SIFIs to ensure fair competition.
  - Identify instruments to be used for SIFIs with difficulties.
  - Consider whether:
    - (i) asset size is a good indicator in the Danish context;
    - (ii) additional requirements may cover capital, liquidity, recovery and resolutions plans, corporate governance, and supervision;
    - (iii) there is a possible need to complement the current Danish resolution framework with additional tools.
  - Take into account developments in international and EU regulations.
- Timing:
  - Report its findings to the Ministry of Business and Growth by end-2012.
- Assessment:
  - The creation of the committee is a positive step.
  - The potential inclusion of a bail-in framework would keep Denmark at the forefront of bank resolution regimes in the EU.

### Policy implications: banking sector vulnerabilities and recommended actions
- Progress and context:
  - The banking sector has made progress in improving financial stability amid restructuring, consolidation, and adaptation to a new regulatory and supervisory environment.
  - Banks have shored up capital and liquidity base, partly achieved by support from the government and the DN.
- Key vulnerabilities:
  - Profitability is weak.
  - Asset quality is low.
  - Capital buffers are not as robust as indicated by regulatory ratios; in some cases capital requirements are fulfilled by hybrids and low risk weights that do not reflect actual risks.
  - Heavy reliance on wholesale funding.
  - A small group of banks may have potential solvency problems.
  - Some smaller banks may have funding problems with the expiration of state guarantee in 2012 and 2013.
  - High indebtedness of borrowers implies small changes in debt service costs (such as an interest rate increase on variable-rate mortgages) and small decreases in income could amplify banks’ loan performance deterioration.
  - Certain mortgage products, such as deferred amortization mortgage loans, if used extensively by borrowers with weak balance sheets, could increase banks’ credit risks.
- Recommended bank-level actions:
  - Continue to build more robust capital and liquidity buffers.
  - Enhance further the transparency of disclosures.
  - Use flexibility embedded in EU regulations to design strong prudential policies, treating Basel III and the CRD IV regulations as floors.
  - Reduce reliance on government and DN support over time given their time frames and constraints.
  - Banks that depend heavily on the DN lending facilities should seek a more sustainable funding structure by increasing deposits and lengthening maturities.
  - Boost capital organically by retaining earnings, restraining dividends, and raising equity.
  - Large banks would benefit from making regular disclosures regarding the new regulatory indicators, in particular loss absorbing capital and risk-weighted assets under Basel III once it is fully implemented.
  - Consider parallel calculation of risk-weighted assets under the standardized approach given large differences in risk weights between the Basel IRB and standardized approach.
- Recommended policy/regulatory measures:
  - Phase out deferred-amortization mortgage loans gradually given their contribution to housing market volatility and potential to increase banks’ credit risks.
  - Reinforce deposit insurance; consider introducing risk-adjusted deposit insurance premia to encourage sound risk management and discourage risky behavior.

*Source: https://www.imf.org/-/media/websites/imf/imported-full-text-pdf/external/pubs/ft/wp/2013/_wp1347.pdf*

---


_Source: https://www.imf.org/-/media/websites/imf/imported-full-text-pdf/external/pubs/ft/wp/2013/_wp1347.pdf_