Monetary Policy

A N A LYS I S
DANMARKS
NATIONALBANK 30 NOVEMBER 2018 — NO. 22
F I NA NC I A L S TABI LI T Y – 2 ND H ALF 2 018
Low interest rates and ample

lending capacity put pressure
on credit standards
The results of the largest banks remain high, underpinned
by income from value adjustments and low loan impairment CONTENT
charges.
Overall, lending growth is limited, but the medium-sized 2 S UMMARY AND

ASS ESS MEN T
banks have strengthened their activities in growth areas
3 LOW IN TER EST RATE S
such as Aarhus and Copenhagen by opening new branches S UP P O RT ACT IVITY,
BUT FIN AN CIA L
and substantially increasing lending for housing purposes. MAR K ETS S HOW
VO L ATIL ITY
It is important for the banks to allow for potential risks
associated with entering into new market areas and to 6 MO N EY L AUND E RING
IS DETR IMEN TAL TO
refrain from using credit standards as a competition FIN AN CIAL S TABILITY
parameter to attract customers. 8 SYS TEMIC CR E D IT

IN S TITUTIO N S’
EAR N IN GS ARE
Money laundering problems have spelled out the need for S TIL L HIGH
increased focus on measures to combat illegal activities. 1 1 MEDIUM- S IZ E D BANKS

AR E GR AV ITAT ING
Efficient anti-money laundering measures call for stronger TOWAR DS TH E LARG E
TOW N S AN D C ITIE S
cross-border cooperation.
1 6 P ROTR ACTED PE RIOD
O F EAS IN G O F C RE D IT
S TAN DAR DS F OR COR
P O R ATE CUS TOM E RS
1 7 THE AGR ICULTU RAL

S ECTO R HAS U NSU STAIN-
ABLY HIGH DE BT
2 1 IN CR EAS IN G PRIC E S

IN THE CO MM E RC IAL
P RO P ERTY MA RKE T
Many A leverage The liquidity 2 2 THE L IQUIDIT Y IN THE

FIN AN CIAL S EC TOR IS
agricultural ratio require- in the financial S TIL L S UFFICIE NT
loans ment sector 2 5 MIN IMUM L EVE RAG E

R ATIO R EQUIRE M E NT
are non-performing, but should result in a is still sufficient and MAY OV ER RULE BU FFE R
most banks have reconsideration of the price of exchanging R EQUIR EMEN TS
scope to realise losses.sk capital targets. is relatively stable.
2 9 AP P EN DIX
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A N A LY S I S — D A N M A R K S N AT I O N A L B A N K 2
F I N A N C I A L S TA B I L I T Y — 2 N D H A L F 2 0 1 8
Summary and assessment
Low interest rates support activity, but trade war Limited lending growth, but continued high debt level
and Brexit affect the financial markets Growth in total lending to households and the cor-
Interest rates remain very low and, combined with porate sector is limited, but it remains high relative
growth abroad, support economic activity in Den- to the size of the economy. The long period of low
mark. The current trade war between the USA and interest rates and expansionary financial conditions
China and uncertain prospects about a future Brexit provides a basis for further risk-taking among credit
agreement between the UK and the EU are increas- institutions. Given the credit institutions’ ample
ing uncertainty among market participants. In the lending capacity, it is important to carefully monitor
euro area, market participants are not expecting credit developments.
positive monetary policy rates until 2020, while US
interest rates are still expected to rise. The dollar has Medium-sized banks are increasing lending to private
strengthened in step with the normalisation of mon- borrowers and their presence in growth areas
etary policy in the USA, thus generating pressure on The medium-sized banks have seen strong lending
a few emerging market economies. Equity markets growth, especially in the growth areas defined as
have declined both internationally and in Denmark Copenhagen and environs and Aarhus. The reason
since late August. The equity price of systemic Danish for the development in these areas is their large
banks has fallen by almost 40 per cent on average population, high rate of migration and house prices
since the beginning of the year, driven mainly by that have been increasing for several years. The me-
price developments in Danske Bank. dium-sized banks have expanded and opened new
branches, most of which are located in the growth
Measures to combat money laundering areas and thus far from their traditional neighbour-
call for stronger cross-border cooperation ing areas. It is important for the banks to consider
Money laundering may undermine customers’ and the higher risk of granting loans far from their local
investors’ confidence in individual banks and the communities. Credit standards should not be used
financial sector in general. This means that money as a competition parameter to attract customers and
laundering can be detrimental to financial stability. gaining a foothold in new areas.
It is the responsibility of the individual bank to
ensure that it has the tools and resources required The agricultural sector has unsustainably high debt
to prevent and identify potential money laundering A large share of the banks’ loans to the agricultural
through its business. That requires banks to have sector is non-performing loans. The financial position
in-depth knowledge of their customers. Econom- of many farmers is so poor that it is doubtful whether
ic crime exploits the infrastructure of the financial their business is viable in the longer run. The banks
sector, which typically has a cross-border dimension. have already impaired a number of the loans, and
Consequently, strengthening cross-border cooper- their earnings are generally high. Consequently, most
ation between the authorities is crucial to combat banks are believed to have scope to tidy up their
money laundering. agricultural portfolios. The large banks’ lending to
the agricultural sector is relatively limited, so they
Bank earnings still buoyed up by value can accommodate even very large realised losses.
adjustments and low loan impairment charges Against that background, Danmarks Nationalbank
The systemic credit institutions’ results remain high, assesses that the agricultural sector does not consti-
still underpinned by high value adjustments and low tute a systemic risk to financial stability in Denmark.
loan impairment charges. Over the past year, their re-
sults have been declining, however, and that develop- There is still sufficient liquidity
ment continued in the 3rd quarter. Unlike the result, in the financial sector
core earnings have been more stable. Net interest Danish banks comply with the short-term Liquidity
income has been under pressure for a long time and Coverage Ratio, LCR, with a certain margin. Overall,
is now at the lowest level for 12 years. The rise in net the banks have excess liquidity, and the price of
fee income and income from administration margins exchanging krone liquidity among the banks is
has offset the decline in net interest income. relatively stable.
Credit institutions are close to meeting an MREL The International Monetary Fund, IMF, expects global
that is in conformity with the EU requirement economic growth of 3.2 per cent in 2018. The IMF has
The systemic credit institutions are currently issuing adjusted its growth forecast downwards by 0.2 per-
eligible liabilities and close to meeting an MREL at centage point since April 2018, inter alia as a result
group level including the mortgage business. How of estimated effects of the current trade war between
ever, Danish systemic credit institutions are not the USA and China.
obliged to meet such a requirement, as mortgage
credit institutions are not subject to an MREL but There is still uncertainty about the future Brexit
to a debt buffer requirement. This creates problems agreement between the UK and the EU and hence
in relation to lack of risk sensitivity and credible also about the consequences of Brexit for financial
resolution planning. stability. A hard Brexit with no agreement in the
financial area could involve a number of risks for
Minimum leverage ratio requirement Danish credit institutions. Generally, the direct ex-
may overrule buffer requirements posures of Danish credit institutions to the UK are
The systemic credit institutions all meet their own limited, but negative effects via the financial markets
capital targets and their excess capital adequacy is cannot be ruled out.
generally solid relative to the fully phased-in capital
requirements. For institutions with a large share of Equity market fluctuations
assets with very low risk weights, the implementation Equity markets have declined since late August, cf.
of a leverage ratio could entail a higher Tier 1 require- Chart 1, but unlike the other indices, the benchmark
ment than the previous risk-based capital require- US stock index, S&P 500, has increased since the cor-
ments. For others, a leverage ratio could constitute a rection at the beginning of the year. The strong falls in
restriction in terms of the ability of the capital buffers equity prices from a high level indicate that changes in
to absorb losses in going-concern institutions, as a market participants’ expectations may lead to sharp
future leverage ratio is a “hard” capital requirement, drops in asset prices.
unlike the capital buffers. Hence, the introduction of
a minimum leverage ratio requirement should induce The Danish stock index, OMX C25, has fallen approxi-
the institutions to reconsider their capital targets in mately 8 per cent since the beginning of the year. The
the medium term to ensure an appropriate level of price of systemic Danish credit institutions is down by
excess capital relative to the new requirement. As a almost 40 per cent on average, driven mainly by price
result, the capital will still be able to absorb losses developments in Danske Bank, cf. Chart 2.
without any risk of resolution of the institution.
The dollar has strengthened
Since the financial crisis, several emerging market
economies have increased their dollar debt ratio,
Low interest rates support activity, which makes them more vulnerable to fluctuations in
but financial markets show volatility the dollar. The dollar has strengthened in step with
the normalisation of monetary policy in the USA,
generating pressure on a few emerging market econ-
omies, e.g. Turkey and Argentina, which have weak
Growth in the global economy, but trade war economies with high debt ratios.2 A large external
and Brexit cause uncertainty funding need, rising US interest rates and concerns
Interest rates remain very low and, combined with about the effect of global trade war have led to a
growth abroad, support economic activity in Denmark. capital outflow, resulting in falling exchange rates,
Danmarks Nationalbank expects the upswing in the cf. Chart 3. Exchange rates for the other emerging
Danish economy to continue in the coming years and market economies have also fallen over the year,
that the economy will move further into the boom.1 but not as strongly.
1 Cf. Danmarks Nationalbank, Boom with no signs of imbalances, Dan- 2 In June 2018, the IMF granted Argentina a 3-year borrowing
marks Nationalbank Analysis (Outlook for the Danish economy), No. 15, programme for up to 50 billion dollars.
September 2018. (link)
Equity markets decline in Chart 1 Equity prices for Danish credit Chart 2
the 3rd quarter institutions have fallen more than
the market in general
Index, 1 Jan. 2018 = 100
110 Index
USA (S&P500)
2 Jan. 2018 = 100
105 110
100
100 OMXC25
90
95
80
Europe (EURO STOXX100)
90 70
SIFI
Denmark (OMXC25) 60
Danske
85
50 Bank
Jan Feb Mar Apr May Jun Jul Aug Sep Oct Nov Dec
2018
40
Jan Feb Mar Apr May Jun Jul Aug Sep Oct Nov Dec
2018
Note: The most recent observations are from 26 November 2018.
Source: Thomson Reuters.
Note: SIFI is an average of price developments for Danske
Bank, Jyske Bank, Sydbank and Spar Nord weighted by
market value. The most recent observations are from 26
November 2018.
Source: Nasdaq OMX Nordic.
Expectations that monetary policy will
be normalised
In the euro area, market participants are not ex-
pecting monetary policy rates to become positive Substantial weakening of exchange Chart 3
until 2020, cf. Chart 4. As from October, the Euro rates in a few emerging market
economies
pean Central Bank, ECB, lowered the bond purchase
level further, announcing that they expect to stop Index for local currency per dollar,
1 Jan. 2018 = 100
purchases by the end of the year, but intend to
80
South
reinvest payments from maturing bonds. The ECB Africa
100
also announced that it expects to keep the monetary
120
policy rates at the current levels, at least through the Brazil
summer of 2019. The ECB’s announcement did not 140

Turkey
lead to any considerable fluctuations in the markets. 160
180
Currency weakening
US monetary policy interest rates have been rising. 200
Market participants expect the interest rates to con- 220
Argentina
tinue rising, but less than expected by the Federal

240
Reserve, cf. Chart 4. Changes in market expectations Jan 2018 Apr 2018 Jul 2018 Oct 2018
regarding interest rate developments could lead to
fluctuations in e.g. the equity market. Note: Local currency. The most recent observations
are from 29 October 2018.
Source: Macrobond.
Purchase programmes from e.g. the ECB and the
Federal Reserve have contributed to dampening
long-term bond yields and have reduced the global
supply of bonds of high credit quality in the market.
For investors holding funds for placement, this pro-
vides a natural opportunity to search other markets
for securities with similar characteristics, including
the Danish mortgage market.
Expectations of positive interest rates Chart 4 More than 30 per cent of outstanding Chart 5
in the EU in 2020 long-term mortgage bonds are held
by foreign investors
Per cent
3.5 Per cent
FOMC expectation
3.0 35
> 20 years
2.5 30
Market expectations
2.0
25
1.5
20
1.0
USA Total
0.5 15
Market expectations 1-5 years
0.0
Euro area 10
-0.5
5
-1.0
2017 2018 2019 2020
0
02 03 04 05 06 07 08 09 10 11 12 13 14 15 16 17 18
Note: The most recent observations are from 29 October 2018.

Fed funds target range for the USA, the ECB’s deposit Note: Foreign investors’ ownership shares of mortgage bonds
rate for the euro area. The broken lines denote market by maturity. The most recent observations are from Sep-
expectations based on futures prices. tember 2018.
Source: Federal Reserve, ScanRate RIO and Macrobond. Source: Danmarks Nationalbank.
Foreign investors increase their ownership Ownership share of long-term Chart 6
share of long-term mortgage bonds mortgage bonds has declined for all
sectors except insurance and pension
Since 2012, foreign investors have shown strong
interest in long-term Danish mortgage bonds. The Per cent
share of mortgage bonds with remaining maturities 50
Insurance and pension
exceeding 20 years owned by foreign investors has 45
increased from 17 per cent to more than 33 per 40

Other asset managers
35
cent since 2016, cf. Chart 5. Other
30
25
The rise is offset by a decline in ownership shares Credit institutions
20
Foreign
broadly distributed across other sectors, except the
15
insurance and pension sector, which has retained its 10
ownership share of just over 30 per cent, cf. Chart 6. 5
Danish credit institutions currently hold 5 per cent of 0
02 03 04 05 06 07 08 09 10 11 12 13 14 15 16 17 18
outstanding long-term mortgage bonds, compared
with almost 15 per cent in 2014, and they are the
largest net sellers of long-term mortgage bonds. Note: The most recent observations are from September 2018.
Source: Danmarks Nationalbank.
On the one hand, growing demand from foreign

investors contributes to a larger investor base,
helping to ensure attractive interest rates for Danish
homeowners. On the other hand, strong reliance on
foreign investors may amplify market fluctuations in
times of crisis, if foreign investors tend to return to
their home markets.
Money laundering is detrimental

to financial stability
Money laundering problems in a number of Euro- The financial markets have reacted strongly to the
pean banks have spelled out the need for increased ongoing publication of information about money
focus on measures to combat misuse of the banking laundering problems in the Estonian branch. The
sector for illegal activities. It is the responsibility of share price has fallen by almost 45 per cent since the
the management of each bank to ensure that it has beginning of 2018, cf. Chart 2. The credit rating agen-
the tools required to prevent and identify potential cies rating Danske Bank have all reacted to the money
money laundering through its business. At the laundering case and changed their expectations to
same time, there is a need for coordinated effort “negative” on the grounds that the scope of the case
between firms and authorities. Economic crime may grow, that there is a risk of sanctions as well as
exploits the infrastructure of the financial sector, the general loss of confidence among customers and
which typically has a cross-border dimension. Con- investors. Standard & Poor’s and Moody’s have down-
sequently, strengthening cross-border cooperation graded their ratings of the bank itself and of its long-
between the authorities is crucial to combat money term issuance. Furthermore, Standard & Poor’s has
laundering. pointed out that Denmark’s credit rating, which is the
highest possible (AAA), could be challenged, should
Money laundering may undermine confidence the external funding of the financial sector come
in the financial sector under pressure because of damage to its reputation.
Customer and investor confidence is an essential
prerequisite for providing financial services. So Danske Bank’s market funding costs have grown in
the loss of confidence can be harmful for a bank. step with the increasing scope of the money launder-
Its sources of funding may be challenged e.g. if ing case. In November, the bank’s senior debt traded
customer uncertainty results in significant deposit at just over 40 basis points higher than senior debt
withdrawals, or if investors demand a substantially issued by other comparable Nordic banks, cf. Chart 7.
higher risk premium on the bank’s issuance. The
bank may also incur higher costs in the form of
fines imposed by the authorities. Moreover, if the
bank is also systemically important to the financial Rising price of Danske Bank’s Chart 7
sector, the challenges of a single bank may have a senior debt

negative impact on society. Finally, increased lack of
Basis points
confidence in a single bank may spread to the other 80
actors in the financial sector and to the authorities. 70
Consequently, money laundering problems in a sin- 60
50
gle bank could spread to the entire financial sector
40
and could in turn affect financial stability. 30
20
Market reactions to the money laundering 10

0
case in Danske Bank
-10
During 2018, the scope of the money laundering Jan 18 Mar 18 May 18 Jul 18 Sep 18 Nov 18 Jan 19
case in Danske Bank’s Estonian branch has grown Danske Bank Nordea
DNB SEB
significantly – also by international standards. The Handelsbanken Swedbank
bank’s internal investigation of money laundering
in the branch comprises transactions of around 200 Note: The zero-volatility spread (Z spread) is an expression of
billion euro in the period 2007-15. Hence, the case the additional costs of obtaining funding with the debt
instrument in question. The additional costs are calcu-
has attracted considerable attention in and outside
lated by parallel-shifting a risk-free zero-coupon yield
Denmark. With a balance sheet total that is 1½ times structure, so the discounting thereby results in the price
of the debt instrument. The most recent observations are
higher than Denmark’s gross domestic product, GDP,
from 8 November 2018.
Danske Bank is Denmark’s largest bank and classi- Source: Bloomberg.
fied as systemically important.
Anti-money laundering measures require their customers and their use of reliable systems to
a coordinated effort by banks and authorities monitor transactions have become key elements in the
The pivotal role of banks in the financial infrastructure efforts to combat money laundering. It is a precondi-
involves a social responsibility to ensure that their tion for the authorities’ ability to efficiently combat and
businesses are not misused for illegal activities. In step investigate money laundering that the banks are ini-
with the increasing speed and efficiency of payment tially capable of identifying and examining suspicious
systems, the importance of the banks’ knowledge of transactions. Moreover, a particularly high degree of
Anti-money laundering provisions in Denmark Box 1
What is money laundering? Continuous tightening of anti-money

Money laundering means to unlawfully receive or obtain laundering legislation
for oneself or others a share in profits or means obtained The Danish anti-money laundering rules are based on
through criminal offence.1 The purpose of money laundering European anti-money laundering directives which constitute
transactions and activities is to conceal the origin of the the framework for measures to combat money laundering
means by a masking process so that they appear to have and terrorist financing. In 2017, the fourth anti-money laun-
originated from a legitimate source, but where the person in dering directive5 was implemented in Denmark, implying
question knows or assumes that such money is derived from a shift from a rule-based approach to a more risk-based
criminal activity. and targeted approach to preventing money laundering.6
For example, the banks are now required to a greater
Key elements of the Danish Money Laundering Act extent to base their knowledge of their customers on a risk
In Denmark, money laundering is combated through assessment of the customer relationship in order to focus
financial undertakings, including banks, in accordance with on the customers associated with the greatest risk. The
the Money Laundering Act. Undertakings covered by the requirements are tightened in particular regarding politically
Act must comply with a number of requirements for the exposed persons, customers failing to appear in person and
purpose of preventing and minimising the risk of money cross-border correspondent banking.7 A previous exception
laundering. Specifically, the undertakings must comply with of certain customers deemed to be of low risk (e.g. other
rules on knowledge about their customers, and they are banks, listed firms and public authorities), has been abol-
obliged to investigate suspicious transactions and notify ished, so all customers must be identified on the basis of
the authorities. One consequence of the banks’ obligation a risk assessment.
to know their customers is that the banks’ customers must
be required to provide proof of identity and that the banks Given the money laundering cases seen in recent years,
must understand the point of the customer’s business con- a number of further national initiatives have also been
nection or the individual transaction. Circumstances such as implemented with focus on increasing the maximum
customer relationships with correspondent banks located penalty for money laundering, the ability to revoke a firm’s
outside the EU or the EEA lead to more stringent require- licence in case of gross violations of the Money Launder-
ments for proof of identity and knowledge of customers. ing Act and setting stricter “fit and proper” requirements
The duty of notification implies that a bank, which is aware regarding members of the management board. Most
of or suspects that any transactions, funds or activities are recently, a political agreement was concluded in September
or have been associated with money laundering or terrorist 2018 to further tighten legislation in this area. The proposal
financing, must notify the Public Prosecutor for Serious strengthens the anti-money laundering secretariat of the
Economic and International Crime.2 In Denmark, the Danish Public Prosecutor for Serious Economic and International
Financial Supervisory Authority (FSA) supervises the banks’ Crime and increases the level of fines significantly. In addi-
compliance with the Act,3 while the foreign subsidiaries and tion, the agreement also contains intentions to extend the
branches of Danish firms are subject to supervision by the requirements to executive boards and boards of directors
supervisory authority of the host country.4 of the firms in question.8
1. Cf. section 3 of Act no. 651 of 8 June 2017 on Measures to Prevent Money Laundering and Financing of Terrorism (The Money Laundering Act).
2. Cf. sections 3 and 5 of the Money Laundering Act.
3. Cf. section 47 of the Money Laundering Act.
4. Danish undertakings operating in another EU or EEA country must comply with national regulation in the country in question regarding
money laundering and financing of terrorism, cf. section 31 of the Money Laundering Act.
5. Directive (EU) 2015/849 of the European Parliament and of the Council of 20 May 2015 on the prevention of the use of the financial system for
the purposes of money laundering or terrorist financing.
6. Cf. page 6 of the Danish Financial Supervisory Authority’s guideline no. 9854 of 11 October 2018 on measures to prevent money laundering
and financing of terrorism (in Danish only).
7. Cf. Part 2 (Risk assessment and risk management) in the FSA guideline defined above.
8. Cf. Agreement of 19 September 2018 between the government parties (Venstre – The Liberal Party of Denmark, Liberal Alliance and the
Conservative People’s Party) and the Social Democratic Party, the Danish People’s Party, the Social Liberals and the Socialist People’s Party on
further initiatives to strengthen the efforts to combat money laundering and terrorist financing.
prudence is required, if a bank chooses to expand its The current loan impairment charges of the systemic
business abroad where knowledge of its customers credit institutions have been considerably below
is challenged. In recent years, a number of political the historical average since 2015, cf. Chart 9. This
initiatives have been taken to strengthen the efforts low level should be viewed in the light of the low
to combat money laundering in Denmark, cf. Box 1. level of interest rates and favourable economic
The fourth money laundering directive involves a developments. During a potential deterioration of
transition to a more risk-based approach to anti- the economy, the level of impairment should be
money laundering, requiring the banks to direct their expected to increase.
anti-money laundering efforts towards those areas
of their business model where the risk is higher. This
change is a step forward as it helps support a more Decline in systemic Chart 8
targeted effort, but it makes demands on the banks’ credit institutions’ earnings
individual risk assessment. In addition, the maximum
Kr. billion
penalty and the level of fines for money laundering 30
have increased and it has become possible to revoke
25
a firm’s licence. Core earnings
20
15
European cooperation to prevent
Profit
money laundering should be strengthened 10
In Europe, the latest cases of money laundering 5

in European banks have also led to proposals for 0
further initiatives. The reinforced anti-money laun-
-5
dering efforts by the Danish authorities are neces
-10
sary, but it is also absolutely essential to create a 05 06 07 08 09 10 11 12 13 14 15 16 17 18
better framework for European cooperation. As
money laundering activities exploit the cross-border
Note: Six-month results of the systemic credit institutions have
financial infrastructure, measures to combat money been calculated before tax and adjusted for goodwill im-
laundering also call for stronger cross-border super- pairment charges. Core earnings are defined as profit be-
fore tax less value adjustments, loan impairment charges
visory cooperation in the EU. This would provide a
and value adjustments of income from investments.
far better overview of international banking groups’ Source: Danmarks Nationalbank.
activities, while at the same time enabling the build-
up of strong competencies in this area.
Loan impairment charges Chart 9

boost profits
Systemic credit institutions’ Kr. billion
earnings are still high 24
20
Loan impairment
charges for the period
16
The systemic credit institutions’ results remain high, 12

Average loan
still underpinned by high value adjustments and low 8
impairment level
loan impairment charges, cf. Chart 8. Over the past

4
year, results have been declining, however, and that
development continued in the 3rd quarter. 0
-4
05 06 07 08 09 10 11 12 13 14 15 16 17 18
Return on equity supported by low
level of impairment
Since 2015, systemic credit institutions have either Note: Six-month data for systemic credit institutions. The aver-
age is calculated over the period under review.
had very low loan impairment charges or reversed
loan impairment charges, thereby supporting the
return on equity, ROE.
The low level of loan impairment charges is attrib-

ROE supported by low Chart 11
utable to the fall in new loan impairment charges, loan impairment charges
while the volume of reversals has been more or less
constant. Since the transition to the new IFRS 9 im- Per cent
20
pairment rules on 1 January 2018, the volume of new
Return on equity
loan impairment charges has increased, however. 15 on average loan
Under IFRS 9, impairment charges must be made for impairment charges
10
both realised and expected losses. This is in con-
trast to the old impairment rules, IAS 39, according 5
to which an objective evidence of impairment must Return on equity
exist before the loan impairment charge was made. 0
-5
-10
Increase in new loan impairment Chart 10 06 07 08 09 10 11 12 13 14 15 16 17 18
charges and reversals
Note: Six-month data for systemic credit institutions. Return
Kr. billion
on equity p.a. is after tax. The average historical level of
10 impairment is calculated over the last 12 years.
8 Source: Danmarks Nationalbank.
New loan impairment charges
6
4
2
0 Rising administration margins Chart 12
-2 and net fees have offset decline

-4 in net interest income
-6
Reversals Kr. billion
-8 30
-10
2014 2015 2016 2017 2018 25
Net interest income
20
Note: Six-month data for systemic banks.
15
Administration margin
10
Part of the explanation of the increase in the volume 5

Net fee income
of loan impairment charges is also that the agricul-
0
tural sector was negatively affected by drought. The
05 06 07 08 09 10 11 12 13 14 15 16 17 18
effect of the impairment charges for the period is
countered by an equivalent increase in the volume of
Note: Six-month data for systemic credit institutions.
reversals, however, cf. Chart 10. Source: Danmarks Nationalbank.
The low level of impairment has a positive effect

on the credit institutions’ ROE. If the current level is
replaced by the average level of impairment over the remained largely constant since 2009. The increase
last 12 years, ROE in the 1st half of 2018 will fall from in net fee income and income from administration
9.5 to 7.3 per cent p.a., cf. Chart 11. margins has offset the decline in net interest income,
cf. Chart 12.
Core earnings are almost unchanged
Unlike the result, core earnings in the systemic credit Net fee income has shown a rising trend since the
institutions have been more stable, cf. Chart 8, also in crisis, but fell back slightly in the 1st half of 2018.
the 3rd quarter of 2018. Income from administration margins has more
than doubled since 2009, since both administra-
Developments in core earnings are driven mainly tion margins and the volume of mortgage lending
by changes in income, given that the cost level has have increased. But over the past year, income from
Increase in average administration Chart 13 Shrinking interest margins Chart 14

margins has stopped
Per cent Per cent

1.0 5
Interest margin, households
Households
0.9 4
0.8
3
0.7 Interest margin, corporates
Corporates 2
0.6
1
0.5
T/N money market interest rate
0
0.4
0.3 -1
2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 2013 2014 2015 2016 2017 2018
Note: Average administration margins for outstanding domes- Note: The interest margin is the difference between the
tic mortgage lending in Danish kroner. average deposit and lending rates.
Source: Danmarks Nationalbank. Source: Nasdaq OMX Nordic and Danmarks Nationalbank.
administration margins has also declined slightly, Modest increase in US interest margins Chart 15
reflecting a slight decrease in average administra-

Per cent
tion margins, cf. Chart 13. 3.5
3.0
Net interest income has been under pressure for
Interest margin, USA
a long time and is currently at a 12-year low. This 2.5
is due primarily to declining interest margins, cf.

2.0
Chart 14. The decreasing interest margins should
1.5
be viewed in the light of the very low money market
rates, exerting downward pressure on both deposit 1.0
Federal funds rate
and lending rates. However, deposit rates have
0.5
not quite mirrored the fall in lending rates, since
the banks generally choose not to charge negative 0.0
2013 2014 2015 2016 2017 2018
interest on deposits from personal customers, and
several banks are still reluctant to charge negative
Note: The US interest margin is calculated as the ratio of
interest to corporate customers. income from the banks’ assets relative to total assets.
The most recent observations are from April 2018.
Source: Federal Reserve Bank of St. Louis.
When interest rates begin to rise again, this will
presumably ease the pressure on the banks’ inter-
est margins, although several factors affect interest
margin developments. As a case in point, improved
credit quality among banking customers may help
to reduce lending rates, because the banks’ risk
decreases. Moreover, there is limited demand for
bank loans.
In the USA, interest rates have been rising in recent

years, and US banks have succeeded in raising inter-
est margins slightly, cf. Chart 15.
Medium-sized banks are gravitating

Stable growth rate Chart 16
towards the large towns and cities in mortgage lending
Per cent
25
Overall, lending growth to households 20
and the corporate sector is limited 15

Total lending to Danish households and corporate 10
customers continues to grow and has reached just
5
under kr. 3,500 billion. Lending growth is driven
0
by mortgage lending, which has shown relatively
-5
stable growth since 2010, cf. Chart 16. However,
bank lending has declined in most of the years -10
04 05 06 07 08 09 10 11 12 13 14 15 16 17 18
during the same period. Oct
Mortgage credit institutions Banks
In recent years, lending growth has been limited

Note: Lending in Denmark by large and medium-sized banks
relative to the increases seen in the run-up to the
and mortgage credit institutions. Growth rates until and
latest crisis. However, it is important to remember including 2017 are calculated at end-December. The most
that debt has not been reduced since the crisis. recent observations are calculated from October 2017 to
October 2018.
Debt is also higher than before the financial crisis, in Source: Danmarks Nationalbank.
terms of lending relative to GDP, cf. Chart 17. Prior
to mid-2009, lending increased relative to GDP. Until
mid-2008, the increase was driven by lending rising
faster than GDP, and in the subsequent year it was Lending relative to GDP remains high Chart 17
driven by a contraction in GDP during the crisis. Due Per cent

Kr. billion
to the cyclical improvement in recent years, under- 4,000 200
pinned by relatively modest lending growth, the Lending
lending-to-GDP ratio has decreased. 3,500 175
By international standards, lending remains high 3,000 150

Lending relative
relative to the size of the economy, cf. Chart 18. But to GDP
(right-hand axis)
2,500 125
high Danish lending is offset by even higher assets.
The long period of low interest rates and expansion-
2,000 100
ary financial conditions provides a basis for further
risk-taking as regards lending. The credit institutions 1,500 75
have ample lending capacity, so it is important to 03 04 05 06 07 08 09 10 11 12 13 14 15 16 17 18
carefully monitor credit developments.

Note: Lending to households and non-financial corporations
in Denmark by all banks and mortgage credit institu-
tions. The most recent observations are from the 3rd
quarter of 2018.
Lending relative to GDP remains high Chart 18 Surge in prices of owner-occupied Chart 19
by international standards flats has slowed down
Per cent Index, 2006 = 100

200 130
180 Owner-occupied flats
160
120
140
120
100 110
80
60 100
40
20
0 90
Single-family houses
Luxembourg
Netherlands
Estonia
Malta
Spain
Sweden
Lithuania
Poland
Austria
Portugal
Finland
Hungary
Ireland
Czech Republic
Denmark
Latvia
Belgium
Germany
Italy
Cyprus
Greece
80
70
06 07 08 09 10 11 12 13 14 15 16 17 18
Note: Lending to domestic households and non-financial cor- Note: Seasonally adjusted. The most recent observations are
porations by credit institutions as well as their holdings from August 2018.
of securities other than equity issued by domestic house- Source: Statistics Denmark and Danmarks Nationalbank.
holds and non-financial corporations. The most recent
observations are from the 2nd quarter of 2018.
Source: ECB and own calculations.
More square metres are being con- Chart 20

structed for each new inhabitant in
Copenhagen and Frederiksberg
Slowdown in price growth for owner-occupied flats
Housing market developments have been stable in 1,000 square meters Ratio
2018. At the national level, house prices have increased 600 140
at a slightly slower pace over the past six months, while 500 120
the surge in prices of owner-occupied flats in large 400

100
towns and cities has slowed down, cf. Chart 19. 80

300
60
200
40
The slowdown in the market for owner-occupied flats
100 20
may be due to several factors. On the supply side,
0 0
construction activity in the larger urban areas helps 2006 2008 2010 2012 2014 2016 2018
to curb prices. Over the past few years, the amount Q3
Completed homes
of newly constructed housing square metres per new
Completed square metres per new capita (r-h axis)
capita in Copenhagen has increased substantially, cf.
Chart 20. On the demand side, all else equal, recent
Note: Data for the municipalities of Copenhagen and
years’ surge in prices means that fewer home buyers
Frederiksberg. Annual growth until and including 2017 is
will be able to finance a home purchase in the larger calculated at end-December. The most recent observa-
urban areas. This trend will presumably be reinforced tions are calculated from the 3rd quarter of 2017 until
the 3rd quarter of 2018.
by new lending rules, introduced in early 2018. These Source: Statistics Denmark, Danmarks Nationalbank and own
rules restrict access to variable rate loans and de- calculations.
ferred amortisation loans in case of high DTI and LTV

ratios.3 Finally, the amendment of the housing taxa-
tion rules from 2021 onwards, adopted last year, can
already have a dampening effect on price increases,
especially for owner-occupied flats in Copenhagen.
3 The rules are binding if a household raises debt constituting more than
four times its income at an LTV ratio exceeding 60 per cent.
Mortgage lending is growing Home owners in the growth areas finance their
most rapidly in the growth areas homes using riskier loan types with variable rates
In recent years, house price growth has varied from and deferred amortisation to a higher extent than
one part of the country to another. Owner-occupied other home owners, cf. Chart 21 (right). At the same
flats, especially in the Copenhagen area, have seen time, more home owners in the growth areas have
high rises in price, while price increases have been higher DTI (debt-to-income) ratios, cf. Chart 22.
smaller in other parts of the country. House price However, new mortgage lending to home owners
and population growth are reflected on the loan with high DTI ratios declined slightly in 2017.
side. Mortgage lending for owner-occupied housing
has risen more in the growth areas in and around The new lending rules introduced in early 2018 help
Copenhagen and in Aarhus than in the rest of the to fence in the risks of risky loan types. As part of the
country, cf. Chart 21 (left). political agreement on the new lending rules, credit
Mortgage lending increases predominantly in the growth Chart 21

areas where riskier loans are taken out
Index, end-2015 = 100 Per cent

120 100
Growth areas 90
27 30
80 cent
Per 36
115
100
70
17 17 29
60
80 39 36
110 19
Large cities 50 16
60 17 17
40 17
16 17
105 30 19
Rest of Denmark 40 17
17
20 39 36
20 29
36
10 27 30
100
2016 2017 2018 0
Rest of Denmark Large
Large cities
cities Growth
Growthareas
areas
Fixed rate, with amortisation

Fixed rate, deferred amortisation
Variable rate, with amortisation
Variable rate, deferred amortisation
Note: Left: Mortgage lending for owner-occupied housing. The most recent observations are from the 3rd quarter 2018. Right: Mortgage
lending taken out in 2017, broken down by loan type. Growth areas are defined as Copenhagen and environs and Aarhus. Large cities
cover the eight largest cities other than the growth areas.
Source: Statistics Denmark, mortgage credit institutions and Danmarks Nationalbank.
institutions were required to report the volume of

Small fall in new mortgage Chart 22
new loans to home owners with high DTI ratios, high lending to home owners with
LTV ratios and risky loan types. The Ministry of Indus- DTI ratios above 4
try, Business and Financial Affairs recently published
Per cent of total new lending
its lending review, which shows that in 2018 the credit 60
institutions have reduced the proportion of new risky
housing loans in accordance with the new rules. 50
Growth areas
40
Medium-sized banks are increasing
lending to households 30
Rest of Denmark
Falling bank lending to households in recent years
20
is attributable primarily to the large banks, which
have reduced lending to households, cf. Chart 23. 10
About 50 per cent of the fall in large banks’ lending
since the peak is due to lower lending for housing 0
99 00 01 02 03 04 05 06 07 08 09 10 11 12 13 14 15 16 17
purposes, which should be seen in the context of
the banks’ transfer of mortgage-like bank loans to
Note: The debt-to-income, DTI, ratio is defined as total debt
the mortgage credit institutions. At the same time, relative to income before tax. Growth areas comprise the
the medium-sized banks are increasing lending to areas Copenhagen City, Copenhagen environs and the
municipality of Aarhus.
households, which has risen by 18 per cent over the
Source: Statistics Denmark and own calculations.
last four years. This rise is driven exclusively by lend-
ing for housing purposes, which has surged by more
than 40 per cent during the same period.
Medium-sized banks’ lending Chart 23
Highest increase in housing loans to households is on the rise

by medium-sized banks in the growth areas
Kr. billion
The medium-sized banks’ lending for housing pur- 400
Large banks, total
poses is increasing especially in the growth areas, 350
cf. Chart 24, same as for mortgage lending. Lending
300
growth is particularly high for the medium-sized Large banks, housing
250
banks based outside Copenhagen. Their lending for
200
housing purposes in the growth areas has surged by Medium-sized banks, total
65 per cent over the past two and a half years. This 150
indicates that the banks are gravitating towards Co- 100

Medium-sized banks, housing
penhagen and Aarhus. This development reflects the 50
large population, high rate of migration and house 0
prices that have been increasing for several years in 03 04 05 06 07 08 09 10 11 12 13 14 15 16 17 18
these areas. As a result of this development, almost

one-fourth of the lending of the medium-sized banks Note: Lending is calculated as a 3-month moving average.
based outside Copenhagen is now granted in the The most recent observations are from October 2018.
growth areas, compared with just over one-fifth at
the end of 2015.
With the fall in lending by the large banks, the

medium-sized banks’ market share of housing loans
is on the rise. If Copenhagen-based medium-sized
banks are disregarded, the market share in the
growth areas has increased from 6 to 9 per cent
since 2015.
Medium-sized banks’ housing loans are growing most rapidly in the growth areas Chart 24
Lending growth, end-2015 - mid-2018
Medium-sized banks
Medium-sized excl. Copenhagen-
Per cent banks based banks
Rest of Denmark 20 40
Large cities 23 36
Growth areas 32 65
Note: Medium-sized banks’ housing loans to households, broken down by regions. Housing loans comprise both owner-occupied
and cooperative housing.
Medium-sized banks are opening branches

outside their neighbouring areas Medium-sized banks are expanding Chart 25
The number of branches has generally been declining in growth areas, 2012-18
for several years, driven by the large banks. Since
No. of branches
2012, they have closed 244 branches nationwide, 20
about half of which in the growth areas and large 16
Other medium-
towns and cities. The large number of branch clos sized banks
12
ures should be seen in the context of digitisation of
8
customer service, entailing that branches can cover Copenhagen-based
4 medium-sized banks
larger areas and more customers.
0
At the same time, medium-sized banks have been -4

expanding, especially in the growth areas, where -8
they have opened 19 more branches than they have -12
closed since 2012, cf. Chart 25. The medium-sized Rest of Denmark Large cities Growth areas
banks generally tend to open new bank branches

outside their traditional neighbouring areas. As a re- Note: The figures cover net branch openings in the period
sult, almost all medium-sized banks are now present 2012 to November 2018.
Source: CVR register.
in the growth areas. The establishment of branches
in large towns and cities help to explain why the
medium-sized banks based outside Copenhagen are
increasing lending in the growth areas.
Entry into new market areas far from the banks’ trad
itional neighbouring areas may involve risks, since,
given the distance, the banks have limited knowledge Protracted period of easing of credit
of the area. Moreover, competition for customers standards for corporate customers
intensifies as medium-sized banks open branches in
new areas. This could lead to easing of credit quality
requirements and conditions for new lending. About
32 per cent of the medium-sized banks’ lending to Mortgage lending is also driving
households have impaired credit quality, which is a lending growth to the corporate sector
significantly higher share than for the large banks, cf. Lending to the corporate sector has continued to
Chart 26. Borrowers in medium-sized banks are there- grow over the past year, cf. Chart 27. Mortgage lend-
fore weaker on average than borrowers in large banks. ing is still driving lending growth to the corporate
According to the banks, they are not easing require- sector, while bank lending by the large and medium-
sized banks is expanding at a slower pace.
Credit standards for corporate customers

A larger share of loans to Chart 26 have been eased for quite a while
households from medium-sized banks Although growth in lending to the corporate sector
has impaired credit quality is limited, risks may build up if credit quality require-
Per cent of exposures
ments are eased. According to Danmarks National
100 bank’s lending survey, the medium-sized banks
90 tightened their credit standards for corporate custom-
Pct.
80 af eksponeringer ers in the 3rd quarter of 2018 after two quarters of
100
70 unchanged credit standards, cf. Chart 28. However, the
60
80 tightening should be seen in the context of the banks’
50
reporting of 14 quarters of continuous easing. The
60
40
large banks have continued to ease credit standards
30
40 for corporate customers in the past two quarters after
20
20 keeping them unchanged in the 1st quarter of 2018.
10
0
According to the lending survey, the protracted period
0
Large banks
Store banker
Medium-sized banks
Mellemstore banker of easing for corporate customers is due to competi
Normal credit quality tion pressures. This has primarily been reflected in
Slightly impaired credit quality, certain signs of weakness
Significant weaknesses, no impairment charges/provisions
Objective evidence of impairment
Note: Exposures are calculated as the sum of lending, guaran-

Mortgage lending is still driving lending Chart 27
tees and unused credit lines before impairment charges
and provisions. Observations are from end-2017. growth to the corporate sector
Source: Danish Financial Supervisory Authority and own calcula-
tions. Kr. billion
1,200
Medium-sized banks
1,000
ments for households. In Danmarks Nationalbank’s

800 Large banks
lending survey, the medium-sized banks responded
that they are not easing credit standards for house- 600
holds. However, they also responded that competitor

400
Mortgage credit institutions
behaviour is negatively affecting credit standards,
but not enough for general easing to be seen. 200
Intensified competition could be the result of the

0
medium-sized banks’ lending growth and expansion 03 04 05 06 07 08 09 10 11 12 13 14 15 16 17 18
towards the cities. While competition is healthy for
the market, it is important that the banks maintain Note: Lending to the corporate sector by large and medium-
high credit standards to ensure that they do not ad- sized banks and mortgage credit institutions, 3-month
moving average. The most recent observations are from
vance in new markets based on excessive risk-taking. end-October 2018.
When the economy reverses, such behaviour could Source: Danmarks Nationalbank.
cause substantial problems.

Credit standards for corporate Chart 28 Medium-sized banks are Chart 29

customers have been eased reporting increased demand from
regularly since 2014 new corporate customers
Index Index
30 50
Easing 40
Increased demand
20 30
20
10
10
0 0
-10
-10 -20
Tightening Reduced demand
-30
-20
-40
-30 -50
10 11 12 13 14 15 16 17 18 10 11 12 13 14 15 16 17 18
Large banks Medium-sized banks Large banks Medium-sized banks
Note: Lending survey for corporate customers. The net balance Note: Lending survey for corporate customers. The net balance
may lie within the interval -100 to 100. A positive (negative) may lie within the interval -100 to 100. A positive (negative)
net balance means that credit managers of the banks in net balance means that credit managers of the banks in
question have, overall, i.e. lending-weighted, stated that question have, overall, i.e. lending-weighted, stated that
they have eased (tightened) their standards relative to demand from new customers has increased (decreased)
the preceding quarter. The most recent observations are relative to the preceding quarter. The most recent obser-
from the 3rd quarter of 2018. vations are from the 3rd quarter of 2018.
Source: Danmarks Nationalbank. Source: Danmarks Nationalbank.
lower margin requirements and lower fees and, to The agricultural sector has
a lesser degree, in lower collateral requirements. unsustainably high debt
In the current environment of economic recovery
and intense competition among banks, it is important
that the banks ensure solid credit quality.
Banks should accept losses on non-viable farms
The medium-sized banks’ credit managers have been While the general economy is booming, the agricul-
reporting increased demand from new corporate tural sector remains in crisis. The agricultural sector
customers for 17 consecutive quarters, cf. Chart 29. does not follow the same business cycle patterns as
The banks should maintain their credit standards, the general Danish economy, and structural challenges
also towards new customers. If credit standards are remain unsolved. In 2018, the sector is also affected
eased, this could result in losses when the economy by drought, which could bring farms closer to default.
reverses and the earnings opportunities of firms
decline. Consequently, the banks should assess firms’ The banks should accept losses on non-viable agricul-
resilience throughout the business cycle to ensure tural customers and help them transfer land and other
their foundation is solid when the economy reverses. assets to farms with better prospects. Even if this
could – at least temporarily – exert downward pres-
sure on land prices.
Banks’ credit policies were too lenient

in the run-up to the latest financial crisis Agricultural land price bubble Chart 30
Ten years after the financial crisis, the agricultural in the run-up to the financial crisis is
still an impediment for agriculture
sector is still hampered by the debt raised from the
credit institutions during the agricultural land price Kr. billion Kr. 1,000 per hectare
bubble, cf. Chart 30. 350 350
Tusinde
300 300
Property price
In the years leading up to 2008, rising land prices (right-hand axis)
250 250
caused the value of agricultural assets to increase
sharply. Credit institutions issued a large number 200 200
of new, large loans to the agricultural sector collat 150 150

eralised against inflated land prices. And in some
100 100
institutions, access to credit was too lenient. Credit institutions' lending to agriculture
50 50
When the bubble burst, the equity of many agri- 0 0

00 02 04 06 08 10 12 14 16 18
cultural customers of the institutions came under
pressure.
Note: Lending to agriculture, forestry and fishing by all
credit institutions. The most recent observations are
In 2011, due to the substantial risks of the sector and
from the 2nd quarter of 2018 for property prices and
very low number of agricultural land transactions, the the 3rd quarter for lending. Adjustment for data break
Danish Financial Supervisory Authority (FSA) conducted in October 2013.
Source: Statistics Denmark, Danmarks Nationalbank and own
a survey of the land prices applied by the credit insti- calculations.
tutions in their impairment calculations. Since then,
the Danish FSA has regularly published the prices per
hectare of agricultural land applied when the Danish
FSA assesses loan impairment charges and provi- Many bank loans to the agricultural Chart 31
sector are NPLs
sions for the solvency need in the credit institutions.
Per cent Per cent
Credit institutions can accept agricultural properties 20 50
as collateral at prices higher than the Danish FSA,
16 40
provided these prices are specifically documented
based on comparable transactions in the property’s 12 30
neighbouring area.
8 20
A large share of the banks’ agricultural 4 10
loans are non-performing loans

0 0
A large share of the banks’ agricultural customers Large banks Medium-sized Agricultural banks
banks
default on their loans. In June 2018, about 40 per
Agriculture's share of lending
cent of the agricultural loans in the medium-sized NPL share, agriculture (right-hand axis)
banks were non-performing loans, NPLs, cf. Chart 31.
By comparison, the share of agricultural NPLs was Note: Share of non-performing loans, NPLs. Agricultural banks
approximately 10 per cent in the large banks. are the five banks in the population whose agricultural
loans account for more than 10 per cent of total lending,
excluding lending to credit institutions. 1st half 2018.
A loan is classified as NPL if the borrower has not Source: Danmarks Nationalbank and own calculations.
paid interest, fees or instalments for more than

90 days, or if it is assessed to be unlikely that the
borrower will fully meet its payment obligations
without any collateral being realised.
Banks have made provisions for

future agricultural losses Provisions for future losses have Chart 32
In the aftermath of the financial crisis, the banks already been made for a large share
of agricultural loans
have written down some of their agricultural ex-
posures, cf. Chart 32. Loan impairment charges are Per cent
recorded for future losses on an ongoing basis in 25
Agricultural
the banks’ corrective accounts. banks
20
However, in 2017, a number of banks reversed

15
previous loan impairment charges due a temporary Medium- Large banks
improvement in farmers’ market conditions. In the 10
sized banks
1st half of 2018, the medium-sized banks increased

their accumulated loan impairment charges again, 5
while loan impairment charges have continued to

fall in the large banks. 0
10 11 12 13 14 15 16 17 18*
Overall, the large banks have made provisions for

future losses for a smaller share of their agricultural Note: Accumulated loan impairment charges are constantly
being affected by new loan impairment charges (in
loans than the medium-sized banks. However, when
creases) and by realised losses on loans (reductions).
it comes to agricultural NPLs, the large banks do not Agricultural banks are the five banks in the population
seem to have made less provisions. whose agricultural loans account for more than 10 per
cent of total lending, excluding lending to credit institu-
tions. The most recent observations for 2018 are for
the 1st half.
Many farmers do not have
Source: Danmarks Nationalbank and own calculations.
a viable business
The financial position of many farmers is so poor
that it is doubtful whether their business is viable
in the longer run. More than half of the credit insti- Many farmers work under Chart 33
tutions’ agricultural loans are granted to farmers with financial constraints
a low equity-to-debt ratio, cf. Chart 33. If only bank
Share of lending, per cent
loans to the agricultural sector are considered, i.e. 100
excluding mortgage loans, around 80 per cent have
High equity, profit
low equity. This indicates that farmers with a poor 80
financial position find it difficult to obtain loans from
mortgage credit institutions. High equity, loss
60
Low equity, profit

At the same time, many farmers with low equity op- 40
erate at a loss and may expect to see further erosion

of their equity. 20
Low equity, loss
0
Equity is the type of financing best suited to ab- 08 09 10 11 12 13 14 15 16 17*
sorb operating losses. If equity accounts for a high
proportion of financing, this will make the financial
Note: Full-time farmers’ debt to credit institutions. Low (high)
position of the individual farmer more resilient and equity is defined as equity of less (more) than 30 per
the debt less risky. cent of the assets. The estimation of data for 2017 takes
as its point of departure the sample of farm financial
statements on which Statistics Denmark’s accounts stat-
Few farmers have previously managed to turn istics for agriculture are based.
Source: Statistics Denmark (individual data) and own calculations.
around their financial position. Over the past five
years of final figures in farm financial statements,

Most farmers with weak financial Chart 34
57 per cent of farmers with operating losses in a ratios have had problems for
given year had operated with a loss for two years several years in a row
in a row and 36 per cent for three years in a row, cf.
Per cent, average 2012-16
Chart 34. The farmers who had turned a loss into
100
a profit did not manage to increase equity signifi-
cantly. 95 per cent of farmers with low equity had 80
had low equity for two years and 92 per cent for
three years. 60
2 years
In recent years, low interest rates have buoyed up in a
40
row
farmers with non-viable finances. More than 80 per 3 years
in a
cent of total agricultural debt to credit institutions 20
row
is variable rate debt – including bank debt. If inter-
est rates rise by 2.5 percentage points, the financial 0
Still loss Still low equity
costs of full-time farmers are expected to increase
by a total of 67 per cent.
Note: Full-time farms. Average for 2011-16. Low (high) equity
is defined as equity of less (more) than 30 per cent of the
Banks may have an incentive to offer assets. Share of full-time farmers in the sample of farm
financial statements, upon which Statistics Denmark’s
forbearance to agricultural customers
accounts statistics for agriculture are based, with low
with non-performing loans equity (loss), as they also had low equity (loss) the pre-
Many non-viable farmers have escaped default for vious year. It cannot be assessed whether farms leaving
the sample have defaulted or have been eliminated for
a number of years. This could indicate that some other reasons.
banks offer forbearance to agricultural customers. Source: Statistics Denmark (individual data) and own calcula-
tions.
However, the number of defaults has been higher
than previously in 2015-18.
If many farms are put up for sale at the same time

in a given area, this may cause local price pres-
sures. That will lead to higher realised losses for
banks which have provided agricultural lending in
that area. This could induce some banks to breathe and, if necessary, by a small share of earnings.
artificial life into farmers that would otherwise de- Against this backdrop, Danmarks Nationalbank
fault. It should be in the interests of both banks and assesses that the agricultural sector does not pose
farmers to make the necessary adjustments in the a systemic risk to financial stability in Denmark.
sector while interest rates remain low.
The medium-sized banks for which agricultural
Most banks have the scope to contribute lending accounts for a limited share of total lending
to the necessary adjustments are also assessed to be able to handle the realisa-
The banks have already written down a number tion of even large agricultural losses.
of the loans, and their earnings are generally high.
Consequently, Danmarks Nationalbank finds that But the medium-sized banks for which agricultural
most banks have the scope to tidy up their agricul- lending accounts for a large share of total lending
tural portfolios. could be faced with serious challenges. When they
are to realise losses on customers with NPLs, this
The large banks’ lending to the agricultural sector could substantially reduce their earnings capacity
is relatively limited, so they can handle even very and, in a worst case scenario, put their excess capital
large realised losses. The losses may be covered adequacy relative to their total capital requirement
by already accumulated loan impairment charges under pressure.
Increasing prices in
Low required returns Chart 35
the commercial property market on commercial properties
Per cent
8
Required yields on
7
The market for commercial properties office properties
is characterised by rising prices 6
and low required rates of return 5
The market for commercial properties is still char- 4

10-year government
bond
acterised by high prices and transaction volumes. 3
Foreign investors account for a considerable share 2
of transactions, particularly in Copenhagen, but as 1

Difference
prices in Copenhagen rise and expected returns fall 0
correspondingly, they, like the Danish investors, are -1

96 98 00 02 04 06 08 10 12 14 16 18
also turning their attention to other Danish cities.
This development shows that the market for com-
Note: CBRE estimates of property investors’ average required
mercial properties is becoming increasingly global
return in the first year in terms of operational income
and that Denmark is seen as an attractive and safe from the property, excluding value adjustments of the
country to invest in. property. The most recent observations are from the
1st quarter of 2018.
Source: CBRE and Danmarks Nationalbank.
One of the reasons for the high prices is that invest
ors require lower returns as a result of the general
fall in interest rates, cf. Chart 35. The latter stimulates The average solvency ratio Chart 36
investment in asset classes generating higher returns is increasing

than bonds do.
Per cent
50
The property companies are better Foreign
property companies
capitalised today than in the pre-crisis years 45
Lower required returns are reflected not only in high
prices for properties traded, but also in the financial 40
statements of the property companies that value
their property portfolios at market price on a current 35
Danish property
basis. Measured by the solvency ratio, i.e. the rela- companies
tionship between a firm’s equity and balance sheet, 30
both Danish and foreign property companies are

25
better capitalised today, cf. Chart 36. Compared with 03 04 05 06 07 08 09 10 11 12 13 14 15 16 17
the pre-crisis years, the rising book values of the
properties do not go hand in hand with rising debt
Note: The solvency ratio is defined as equity relative to total
levels to the same extent. assets.
Source: Own calculations based on data from Bisnode and the
CVR register.
The improved solvency ratio mainly reflects a de-
cline in the number of thinly capitalised property
companies, defined as companies with a solvency
ratio below 20 per cent, cf. Chart 37. However, more
property companies seem to be increasing their
debts substantially. A sudden interest rate hike could
have a negative impact on property prices, thereby
squeezing the companies’ earnings and balance
sheets. In addition, a price drop may be reinforced if
foreign actors withdraw from the market.
Fewer thinly capitalised Chart 37

The liquidity in the financial
property companies sector is still sufficient
Per cent
45
Danish property
companies
40
The banks are LCR compliant
35 The Danish banks fulfil the short-term Liquidity
30
Coverage Ratio, LCR, requirement with a certain
Foreign property margin, cf. Chart 38. This requirement is to ensure
companies
25 that the banks have sufficient liquid funds to with-
stand a 30-day liquidity stress scenario. The banks
20
must calculate the ratio on a daily basis, but follow-
15 ing a review of financial regulation, the Danish FSA
03 04 05 06 07 08 09 10 11 12 13 14 15 16 17
has announced that the calculation frequency may
be reduced for some non-systemic banks with a
Note: A thinly capitalised property company is defined as a
stable, high LCR.
company with a solvency ratio below 20 per cent.
Source: Own calculations based on data from Bisnode and the
CVR register. The Danish banks also observe the Danish FSA’s
3-month liquidity stress requirement, which is part of
the Supervisory Diamond and based on a projection
of the LCR with a few adjustments.
Pct.
The banks fulfil the LCR requirement with a certain margin Chart 38
500
Systemic banks Non-systemic banks
400
Per cent Per cent
500 500
300
400 400
300 300
200
200 200
100
100 100
Minimum requirement Minimum requirement
0 0
0
Nov 16
Jan 17
Nov 17
Jan 18
Sep 18
16
Feb 16
Apr 17
17
Feb 18
Apr 18
Mar 17
Mar 18
Aug 17
Aug 18
16
17
18
Jun 17
Sep 16
17
Jun 18
Sep 17
17
18
18
Nov 16
17
Nov 17
18
Dec 16
Apr 17
Apr 18
Sep 18
Feb 16
Dec 17
Feb 18
17
18
16
May 17
17
18
18
Jun 17
Sep 16
Jul 17
18
Sep 17
17
Jul 18
May 18
dec 16
Jul17
Jan17
Mar17
Okt17
Okt17
Oct18
feb 18
maj 18
Okt18
sep 16
Dec17
Jan18
okt 16
Aug16
okt 17
Jun17
May17
mar 18
Aug17
jun 17
jul 17
May18
Okt18
Jul
Dec
Oct
Mar
mar
maj
okt
nov
apr
nov
apr
feb
dec
jun
sep
jan
aug
sep
jan
Median 10th percentile 90th percentile
Note: The LCR (Liquidity Coverage Ratio), which must be higher than 100 per cent, is calculated as the bank’s liquid assets divided by
outgoing net cash flows over a 30-day stress period. The most recent observations are from end-October 2018.
Credit institutions are close to meeting an MREL

at group level including the mortgage business Credit institutions are close to Chart 39
meeting an MREL at group level
The systemic credit institutions are currently issuing including the mortgage business
eligible liabilities and are not far from meeting a
Kr. billion
requirement4 at group level including the mortgage
350
business, cf. Chart 39. An MREL is to ensure sufficient
300
liabilities to absorb losses in a failing bank so that
250
it can keep operating or be resolved in accordance
200
with its individual resolution plan. 150
100
However, Danish systemic credit institutions are not 50
bound by an MREL at group level as mortgage credit 0
institutions are not subject to an MREL but to a debt Danske
Bank
Jyske
Bank
Sydbank Nykredit Spar Nord
Realkredit Bank
DLR
Kredit
buffer requirement. The latter constitutes a fixed share Liabilities for compliance
of lending. This creates problems in relation to lack of Requirement under Danish rules (incl. mortgage credit institutions)
MREL at group level (incl. mortgage credit institutions)
risk sensitivity and credible resolution planning. The
total requirement for Danish credit institutions is cur-
Note: Either 8 per cent of assets or two times the total capital
rently more or less identical to an MREL at group level requirement including capital buffer requirements,
including the mortgage business, cf. Chart 39. whichever is higher. Eligible liabilities and own funds
include unsecured senior debt, eligible liabilities and
total capital. Until 2022, the requirements may be fulfilled
There is still sufficient krone liquidity by means of unsecured senior debt meeting certain
With a few exceptions, the net position of monetary conditions. The point of departure is the fully phased-in
requirement and a countercyclical capital buffer of 1 per
policy counterparties against Danmarks Nation- cent. Requirements under Danish rules are based on
albank has been within the interval kr. 150 to 200 financial statements at end-2016. The most recent obser-
vations for issuance are from 7 September 2018.
billion in recent years. In other words, the banks Source: Published MRELs, financial statements for 2016 and the
overall have excess liquidity. In March 2018, the net 1st half of 2018 and Danmarks Nationalbank.
position was approaching kr. 100 billion, cf. Chart 40,

and there were indications that krone liquidity was
becoming scarcer. This was reflected in a high price
The net position indicates that Chart 40
for interbank krone liquidity, the Tomorrow/Next,
there is still excess liquidity
T/N, rate, at that time, cf. Chart 41.
Kr. billion
For some years, the Danish money market has been 400
Net position
characterised by falling activity, the largest share 350
of turnover being driven by currency swaps. The 300
modest turnover in money market lending should be 250
viewed in the context of ample krone liquidity among 200
the banks overall. 150
100 Certificates of deposit

Developments in the T/N rate support the assess- 50
Current account deposits
ment that in general there is sufficient liquidity in the 0
Monetary policy loans
sector as the rate has been more or less stable in the -50
2015 2016 2017 2018
range from -0.45 to -0.55 since the introduction of
daily purchases/sales of certificates of deposit in
February 2017, cf. Chart 41. At the turn of the month, Note: The most recent observations are from 26 November 2018.
4 Cf. Articles 1 and 2 of Commission Delegated Regulation (EU)

2016/1450 of 23 May 2016 supplementing Directive 2014/59/EU of the
European Parliament and of the Council with regard to regulatory tech-
nical standards specifying the criteria relating to the methodology for
setting the minimum requirement for own funds and eligible liabilities.
and especially at the turn of the quarter, interest

T/N rate and credit spread do not Chart 41
rates are higher, however. indicate a general shortage of liquidity
The credit spread5 for short-term liquidity in the Per cent

0.3
money market has also been relatively constant
0.2
during this period. This indicates that there are no
3-month credit spread
0.1
problems in relation to borrowing liquidity in the (CIBOR-CITA)
0.0
money market. T/N rate DKK
-0.1
-0.2
Longer-dated mortgage bonds behind loans with
reference rate have contributed to reducing the -0.3
annual refinancing volume -0.4
For a number of years, focus has been on reducing -0.5
and spreading the total volume of refinancing in -0.6

2017 2018
order to reduce the refinancing risk for variable rate
mortgage loans. The total refinancing volume is now
Note: Daily observations of T/N rate and spread between
considerably lower than at the peak in 2013, and
CIBOR 3M fixing and CITA 3M fixing in Denmark since
especially the volume of very short-term adjustable 1 February 2017. The most recent observations are from
rate loans has been reduced, cf. Chart 42. Variable 23 November 2018.
Source: Nasdaq OMX Nordic.
rate loans now account for 62 per cent of total
mortgage lending.
One measure that has helped to spread and reduce

the total volume of refinancing has been the intro- The annual refinancing volume has Chart 42
been reduced
duction of loan types based on a reference interest
rate, e.g. the CITA 6 rate, but financed by bonds with Kr. billion
a maturity of typically 3-5 years.6 The longer matur- 1,200
ities of the bonds contribute to reducing the volume, 1,000

while borrowers still have short fixed-interest periods.
800
These loans have gradually become more popular,
and loans based on a reference rate now account for 600
30 per cent of the annual refinancing volume. 400
200
Loans based on a reference rate are purchased
mainly by Danish credit institutions 0
2008
2009
2010
2011
2012
2013
2014
2015
2016
2017
2018
2019
The group of investors in bonds with a reference rate

in Danish kroner (CITA or CIBOR) comprises mainly F1 F2 F3 F5 F10 Reference rate
Danish investors, the majority of which are credit

institutions, cf. Chart 43. In terms of ensuring sales Note: The refinancing volume includes various loan types. The
opportunities in a stress situation a broad group of breakdown by refinancing frequency has been estimated
on the basis of changes in the nominal outstanding
investors is desirable. volumes within the relevant intervals for remaining time
to maturity. F1-F10 indicate adjustable rate loans with a
fixed rate of interest for the number of years stated. F1
is adjustable rate loans with a fixed interest period of 1
year and so forth. The most recent observations are from
August 2018.
5 The credit spread is calculated as the spread between CIBOR and
CITA and estimates the credit premium for exchange of liquidity
between banks. CIBOR is the interest rate at which a bank is willing
to lend Danish kroner to another bank for a period on an uncollat
eralised basis. Hence, CIBOR includes a credit risk. CITA is the swap
rate at which a bank is willing to pay to receive the daily T/N fixing
over an agreed period. No principal amount is exchanged when
trading CITA interest rate swaps, so the credit risk is very limited.
6 They are marketed as e.g. “Flexkort®” (flex short), “F-kort” (F short) or

“Kort Rente” (short-term interest rate).
Investor breakdown of various types of mortgage bonds Chart 43
Per cent
100
90
80
70
60
50
40
30
20
10
0
CITA CIBOR Euribor RTL Fixed-rate
Credit institutions Insurance and pension Abroad Investment associations Households Other
Note: Average investor distribution in the period from July 2015 until and including August 2018, based on end-of-month data.
Source: Scanrate and Danmarks Nationalbank.
Minimum leverage ratio requirement

may overrule buffer requirements
Issuance of subordinated capital boosts own funds as dividends or via share buy-back programmes. In
The systemic credit institutions all meet their own cap- addition, the transition to the new IFRS 9 impairment
ital targets and their excess capital adequacy is gener- rules has generally led to a small decline in Common
ally solid relative to the fully phased-in requirements in Equity Tier 1 because the level of loan impairment
the Capital Requirements Regulation, CRR. The insti- charges is higher under the new rules.8 However,
tutions also have sufficient capital to meet the coun- several systemic credit institutions have increased
tercyclical capital buffer requirement, which will be 1 their total own funds over the last year by issuing
percentage point with effect from 30 September 2019.7 Additional Tier 1 capital and Tier 2 capital.
The relatively high earnings over the last year have Systemic credit institutions observe
led to only modest increases in Common Equity Tier capital requirements in stress test
1 capital among the systemic credit institutions, cf. Danmarks Nationalbank’s accounts-based stress test
Chart 44. This is primarily because the earnings are to shows that the systemic credit institutions all have
a large extent distributed to shareholders, either sufficient capital to withstand a severe recession
7 The Systemic Risk Council expects to recommend a further increase of 8 Danske Bank, Sydbank and Spar Nord Bank have chosen to apply the
the buffer rate by 0.5 percentage point in the 1st quarter of 2019 un- transitional arrangement for IFRS 9, which means that the new rules
less the risk build-up in the financial system slows down considerably, do not take full effect until the 2023 capital statement. The transition-
cf. press release (link). al arrangement does not apply to mortgage lending measured at fair
value.
Several systemic credit institutions have increased their own funds Chart 44
by issuing subordinated capital
Per cent of risk-weighted exposures
Danske DLR Jyske Nordea Nykredit Spar Nord Sydbank

Bank Kredit Bank Kredit Realkredit Bank
35
30
25
20
15
10
0
30 30 30 30 30 30 30 30 30 30 30 30 30 30
Sep Sep Sep Sep Sep Sep Sep Sep Sep Sep Sep Sep Sep Sep
17 18 17 18 17 18 17 18 17 18 17 18 17 18
Common Equity Tier 1 Additional Tier 1 Tier 2
Source: Danish Financial Supervisory Authority and published financial statements.
scenario.9 They keep a comfortable distance to the stress, SRISK, cf. Chart 45.11 The level of SRISK has fallen
minimum capital requirement, but a few are close to in line with the diving equity prices of Danish systemic
exceeding the total capital requirement, even though credit institutions in recent months, cf. Chart 2. The fall
the severe stress scenario excludes the countercyc in the indicator reflects that the market’s assessment of
lical capital buffer.10 In the severe scenario, the insti- the institution’s robustness has been reduced.
tutions’ aggregate excess capital adequacy relative
to the total capital requirement is approximately On 2 November 2018, the European Banking Authority,
3 percentage points, but the figure masks consider- EBA, published the results of a pan-European stress
able divergence between the institutions. test. From Denmark, Danske Bank, Nykredit and Jyske
Bank were included in the stress test, while the Danish
Danmarks Nationalbank also estimates an indicator for Financial Supervisory Authority chose to let Sydbank
the stock exchange listed systemic credit institutions’ conduct a similar stress test. In the pan-European
market-based excess capital adequacy in a severe test, the capital ratios of the Danish institutions are
9 In the stress test, the institutions’ excess capital adequacy over the next 11 In the stress scenario it is assumed that stock indices tumble by at least
three years has been assessed in three different macroeconomic scen 40 per cent over a six-month period. See Oliver J. Grinderslev and Kris-
arios. Danmarks Nationalbank has applied a new approach to making tian L. Kristiansen, Systemic risk in Danish banks: Implementing SRISK
the scenarios countercyclical, i.e. more severe in good times and mild- in a Danish context, Danmarks Nationalbank Working Paper, No. 105,
er in bad times. The stress scenarios and the results of the stress test, 2016 (link).
as well as the underlying methodology, are described in more detail
in Danmarks Nationalbank Analysis (Stress Test), No. 21, 30 November
2018.
10 In the stress test, it is assumed that the countercyclical capital buffer

will be released in the severe stress scenario. Hence, the total capital
requirement in the severe scenario comprises the minimum capital
requirements, a Pillar 2 add-on, the SIFI buffer and the capital conser-
vation buffer.
reduced by between 4 and 5 percentage points, but

Market-based stress test, SRISK, Chart 45
all of them still have excess capital adequacy relative shows a decline in robustness among
to the aggregate capital requirement if the counter systemic credit institutions
cyclical capital buffer is disregarded. The relatively
Per cent of assets
large decline in capital ratios should be viewed in the
14
light of an extremely severe scenario in which Den-
12
mark is much harder hit than Europe in general.
10
Sydbank
8
Minimum leverage ratio requirement Jyske Bank
6
may overrule risk-based capital requirements
4
Today, the leverage ratio is implemented as a disclo-
2
sure requirement in the EU. Following the adoption
of a revised Capital Requirements Regulation, CRR2, 0
the ratio will be a new minimum capital requirement, -2

Danske Bank
meaning that Tier 1 capital (Common Equity Tier 1 -4
06 07 08 09 10 11 12 13 14 15 16 17 18
plus Additional Tier 1) must constitute at least 3 per
cent of non-risk weighted exposures.12 According to
Note: 3-month moving averages of market-based excess capital
the most recently published risk reports, the sys- adequacy during stress. It is defined as the difference be-
temic credit institutions all have leverage ratios well tween the market value of assets, calculated under stress,
and the book value of liabilities, excluding equity, less a
above the future minimum requirement, cf. Chart 46.
capital requirement of 3 per cent of the assets measured
by the market value. The most recent observations are
For institutions with a large share of assets with very from the 2nd quarter of 2018 for financial statements and
15 October 2018 for equity prices.
low risk weights, the leverage ratio could entail a Source: Bloomberg, SNL Financial and own calculations.
higher Tier 1 requirement than the risk-based capital
requirements applying until now. It looks as if this
might be the case for two of the systemic credit insti-
tutions, which have mortgage credit as the most sig- Systemic credit institutions Chart 46
meet future minimum leverage
nificant leg of their business models, cf. Chart 47. For
ratio requirement
the other institutions, the risk-based capital require-
ments (including capital buffers) can still be expect- Per cent of unweighted exposures
9
ed to constitute the highest Tier 1 requirement.
8
7
However, the minimum leverage ratio requirement
6
could also have an impact on these institutions as it
5
Nykredit Realkredit
could constitute a restriction in terms of the ability of

4
Spar Nord Bank
the capital buffers to absorb losses in going-concern

Nordea Kredit
Danske Bank
3
Jyske Bank
institutions. The capital buffer requirements are basic

DLR Kredit
2
Sydbank
ally “soft” requirements, so non-compliance will result 1

in a number of restrictions on an institution’s oppor 0
tunities to distribute dividend and pay out bonuses.13 Leverage ratio
New minimum leverage ratio requirement
In contrast, the minimum ratio will be a “hard” re-
quirement and non-compliance will mean that the
institution may not continue to operate. Consequent- Note: The most recently published leverage ratio for each
institution – as at 31 December 2017 for DLR Kredit,
Jyske Bank and Spar Nord Bank, 30 June 2018 for Nordea
Kredit and 30 September 2018 for Danske Bank, Nykredit
Realkredit and Sydbank.
Source: Risk reports/Pillar 3 disclosures.
12 In May 2018, negotiations between the member states on the Euro

pean Commission’s proposal from November 2016 to amend the
Capital Requirements Regulation, CRR, and the Capital Requirements
Directive, CRD, were concluded. The proposal is still being negotiated
with the European Parliament, but no amendments are expected in
relation to calibration of the leverage ratio.
13 Furthermore, the institution is required to prepare and submit a cap-

ital plan to the Danish Financial Supervisory Authority. The Authority
may also take a number of discretionary measures.
A future minimum leverage ratio requirement may overrule risk-based capital requirements Chart 47
Per cent of unweighted exposures
5
Risk-based Tier 1 Non-risk-based Tier 1
capital requirement capital requirement
4
0
Danske Bank DLR Kredit Jyske Bank Nordea Kredit Nykredit Realkredit Spar Nord Bank Sydbank
Minimum leverage ratio requirement Minimum Tier 1 capital requirement, risk-based
Pillar II add-on, to be met using Tier 1 capital Capital buffer requirement
Note: The risk-based requirements for Tier 1 capital are shown as percentages of unweighted exposures so as to enable immediate compari
son with the minimum leverage ratio requirement. The capital buffer requirement reflects the fully phased-in requirements for the SIFI
buffer, the capital conservation buffer and a countercyclical capital buffer of 1 per cent. It has generally been assumed that 75 per cent
of the Pillar 2 add-on is to be met using Tier 1 capital, but that Danske Bank’s Pillar 2 add-on in relation to compliance and reputational
risk must be met 100 per cent by means of Common Equity Tier 1.
Source: Danish Financial Supervisory Authority, risk reports/Pillar 3 disclosures, published financial statements and own calculations.
ly, the introduction of a minimum leverage ratio use of capital buffers to absorb losses, particularly in
requirement should make the institutions reconsider institutions with a large share of low-risk assets.
their medium-term capital targets in order to ensure
sufficient excess capital adequacy relative to the new Both the leverage ratio and the output floor will po-
requirement so that the capital can still absorb losses tentially strengthen the institutions’ capitalisation by
without the institution risking resolution. requiring them to hold more capital. But at the same
time, they may have an unfortunate impact on the
In the longer term, the introduction of an “output institutions’ incentives to pursue sound risk policies. If
floor” is expected to increase capital requirements by the leverage ratio is binding on the individual institu-
an average of 34 per cent compared with the current tion, it will completely remove the risk sensitivity of the
level for the five largest Danish credit institutions.14 capital requirements. In other words, the capital re-
If the output floor is implemented in EU legislation in quirement will be the same for a loan with a very high
accordance with the recommendations of the Basel risk and a loan with a very low risk. If the output floor
Committee, it will become a binding requirement is binding instead, risk sensitivity will depend on the
for most of the systemic institutions by 2027 at the risk weighting using the standardised approach. This
latest.15 But even after that, the minimum leverage entails a higher degree of risk sensitivity than the lever-
ratio requirement may impose a restriction on the age ratio, but a substantial reduction of risk sensitivity
relative to the risk weighting of the IRB approaches.
14 See Ministry of Business, Industry and Financial Affairs, Effekter af

Baselkomitéens anbefalinger om kapitalkrav til kreditinstitutter (Effects
of the Basel Committee’s recommendations on capital requirements
for credit institutions – in Danish only), February 2018 [link].
15 The Basel Committee envisages phasing-in of the output floor in the

period from 2022 to 2027.
Appendix: Data for the analysis
The analysis applies the term “credit institutions” because the model for classification of SIFIs has been
when referring to both banking and mortgage credit adjusted. The analysis also includes the non-systemic
institution activities. The term “bank” refers specifical- banks in the Danish Financial Supervisory Authority’s
ly to entities carrying out banking activities. group 2 in 2018. These institutions are listed in Table
1. Unlike in the Authority’s group 2, Saxo Bank has
The analysis of Danish credit institutions’ earnings, been omitted because of its business model. The
liquidity and own funds comprises seven systemic grouping applies back in time.
credit institutions. Besides the six credit institu-
tions classified by the Danish Financial Supervisory In the analysis and assessment of lending activity, focus
Authority as systemically important financial institu- is on the grouping of large and medium-sized banks in
tions, SIFIs, in 2018, Spar Nord Bank has been includ- Danmarks Nationalbank’s lending survey. Large banks
ed as both a systemic credit institution and a system- are the Danish Financial Supervisory Authority’s group
ic bank. The reason is that the Ministry of Industry, 1 plus Nordea Danmark, while medium-sized banks are
Business and Financial Affairs in December 2017 the Danish Financial Supervisory Authority’s group 2
announced that Spar Nord Bank will become a SIFI plus Handelsbanken and Santander Consumer Bank.
Institutions in the analysis by balance sheet total as at 30 June 2018, kr. million Table 1
Systemic credit institutions Amount Non-systemic banks Amount
Danske Bank (including Realkredit Danmark) 3,234,694 Ringkjøbing Landbobank 49,859
Nykredit Realkredit (including Nykredit Bank) 1,422,310 Arbejdernes Landsbank 49,691
Jyske Bank (including BRFkredit) 593,002 Sparekassen Kronjylland 25,055
Nordea Kredit 439,160 Sparekassen Sjælland-Fyn 23,318
DLR Kredit 157,929 Vestjysk Bank 21,560
Sydbank 136,147 Sparekassen Vendsyssel 20,789
Spar Nord Bank 83,561 Lån & Spar Bank 20,530
Systemic credit institutions, total 6,066,803 Jutlander Bank 17,487
Den Jyske Sparekasse 15,458
Systemic banks Non-systemic banks, total 243,747
Danske Bank 2,320,801
Jyske Bank 286,510 Mortgage credit institutions
Nykredit Bank 173,375 Nykredit Realkredit (including Totalkredit) 1,358,470
Sydbank 138,430 Realkredit Danmark 858,384
Spar Nord Bank 83,690 Nordea Kredit 439,160
Systemic banks, total 3,002,806 BRFkredit 339,696
DLR Kredit 157,929
LR Realkredit 24,541
Mortgage credit institutions, total 3,178,180
Note: The balance sheet totals of systemic banks, non-systemic banks and mortgage credit institutions are stated at institution level,
while the balance sheet totals of the systemic credit institutions are stated at group level.
Source: Danmarks Nationalbank..
A N A LY S I S — D A N M A R K S N AT I O N A L B A N K
ABOUT As a consequence of Danmarks National- Analyses are published continuously and

bank’s role in society we conduct analyses include e.g. assessments of the current
ANALYSIS
of economic and financial conditions. cyclical position and the financial stability.
The analysis consists of a Danish and an English version. In case of doubt regarding the correctness of the
translation the Danish version is considered to be binding.
DANMARKS NATIONALBANK
HAVNEGADE 5
DK-1093 COPENHAGEN K
WWW.NATIONALBANKEN.DK
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A N A LYS I S

F I NA NC I A L S TABI LI T Y – 2 ND H ALF 2 018

Low interest rates and ample

Overall, lending growth is limited, but the medium-sized 2 S UMMARY AND

parameter to attract customers. 8 SYS TEMIC CR E D IT

increased focus on measures to combat illegal activities. 1 1 MEDIUM- S IZ E D BANKS

1 7 THE AGR ICULTU RAL

2 1 IN CR EAS IN G PRIC E S

Many A leverage The liquidity 2 2 THE L IQUIDIT Y IN THE

loans ment sector 2 5 MIN IMUM L EVE RAG E

Summary and assessment

summer of 2019. The ECB’s announcement did not 140

tinue rising, but less than expected by the Federal

Note: The most recent observations are from 29 October 2018.

Foreign investors increase their ownership Ownership share of long-term Chart 6

increased from 17 per cent to more than 33 per 40

On the one hand, growing demand from foreign

Money laundering is detrimental

sector, the challenges of a single bank may have a senior debt

Market reactions to the money laundering 10

Anti-money laundering provisions in Denmark Box 1

What is money laundering? Continuous tightening of anti-money

In Europe, the latest cases of money laundering 5

Loan impairment charges Chart 9

Systemic credit institutions’ Kr. billion

earnings are still high 24

The systemic credit institutions’ results remain high, 12

loan impairment charges, cf. Chart 8. Over the past

The low level of loan impairment charges is attrib-

-2 and net fees have offset decline

Part of the explanation of the increase in the volume 5

The low level of impairment has a positive effect

Increase in average administration Chart 13 Shrinking interest margins Chart 14

Per cent Per cent

reflecting a slight decrease in average administra-

is due primarily to declining interest margins, cf.

In the USA, interest rates have been rising in recent

Medium-sized banks are gravitating

Overall, lending growth to households 20

and the corporate sector is limited 15

In recent years, lending growth has been limited

driven by a contraction in GDP during the crisis. Due Per cent

By international standards, lending remains high 3,000 150

carefully monitor credit developments.

Per cent Index, 2006 = 100

More square metres are being con- Chart 20

the surge in prices of owner-occupied flats in large 400

towns and cities has slowed down, cf. Chart 19. 80

ferred amortisation loans in case of high DTI and LTV

Mortgage lending increases predominantly in the growth Chart 21

Index, end-2015 = 100 Per cent

Fixed rate, with amortisation

institutions were required to report the volume of

Highest increase in housing loans to households is on the rise

indicates that the banks are gravitating towards Co- 100

these areas. As a result of this development, almost

With the fall in lending by the large banks, the

Lending growth, end-2015 - mid-2018

Medium-sized banks are opening branches

Overall, lending growth is limited, but the medium-sized 2 S UMMARY AND

parameter to attract customers. 8 SYS TEMIC CR E D IT

increased focus on measures to combat illegal activities. 1 1 MEDIUM- S IZ E D BANKS

1 7 THE AGR ICULTU RAL

2 1 IN CR EAS IN G PRIC E S

Many A leverage The liquidity 2 2 THE L IQUIDIT Y IN THE

loans ment sector 2 5 MIN IMUM L EVE RAG E

of new, large loans to the agricultural sector collat 150 150

institutions. The capital buffer requirements are basic

12 In May 2018, negotiations between the member states on the Euro