Title Denmark : financial system stability assessment

Published Washington, D.C. : International Monetary Fund, 2014 ©2014

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Description 1 online resource (50 pages) : color illustrations Series IMF Country Reports ; no. 14/336 IMF country report ; no. 14/336. Contents Cover; CONTENTS; GLOSSARY; EXECUTIVE SUMMARY; STRUCTURE AND RECENT PERFORMANCE OF THE FINANCIAL SECTOR; A. Large and Interconnected Financial System; B. Global Crisis and Aftermath; FINANCIAL SECTOR RESILIENCE; A. Banking Sector Stress Tests; B. Insurance and Pension Sectors Stress Tests; C. Improving Risk Assessments; D. Interconnectedness and Spillovers; FINANCIAL OVERSIGHT FRAMEWORK; A. Mortgage Finance; B. Prudential Supervision; C. Macroprudential Policy; D. Cross-Border Cooperation; E. AML/CFT; SAFETY NETS, BANK RESOLUTION, AND CRISIS MANAGEMENT; BOXES 1. Government Measures to Strengthen Financial Stability2. Balance Principle in Mortgage Credit Institutions; FIGURES; 1. Structure of the Financial System; 2. Household Balance Sheets; 3. Credit Growth and House Prices; 4. Banking Sector; 5. Banking Indicators by Group; 6. Mortgage Credit Institutions; 7. Insurance Sector; 8. Denmark FSAP: Stress Testing Program; 9. Stress Test Scenarios-Real GDP; 10. Solvency Stress Test-Commercial Banks and MCIs; 11. Solvency Stress Tests-Sensitivity Results; 12. Liquidity Coverage Under Stress; 13. Stability of Bank Funding 14. Insurance Stress Test-Solvency Ratios15. Cross-Sector Exposures; 16. Cross-Bank Spillovers; 17. Cross-Border Spillovers; 18. Supervisory Diamond for Banks; 19. Traffic Light System for Insurers; TABLES; 1. Key Recommendations; 2. Financial Soundness Indicators (2006-2013); APPENDICES; I. Key Recommendations of the 2006 FSAP; II. Risk Assessment Matrix; III. Stress Test Matrix (STeM) for the Banking Sector; IV. Stress Test Matrix (STeM) for the Insurance Sector Summary EXECUTIVE SUMMARY The Danish authorities have taken important steps in recent years to improve financial system resilience. Financial regulation and supervision have been strengthened. A new bank resolution framework that includes bail-in of creditors has been adopted and deployed to resolve small and medium-sized banks. An institutional framework for macroprudential policy has also been adopted. Recent legislation requires maturity extension of covered bonds in stress situations, with the aim of reducing refinancing risk in the mortgage finance system. Although stress tests suggest that financial stability risks are contained, the financial system's large size and interconnectedness call for additional measures to further strengthen resilience. In a severe stress scenario, solvency levels at large banks and mortgage credit institutions (MCIs) remain well above regulatory requirements, owing to high current capital ratios. Stress tests also suggest that concentration risk and extreme increases in covered bond spreads would be manageable. However, this analysis cannot fully capture second-round and non-linear effects, and so may underestimate contagion risks that are material in light of the large size and interconnectedness of balance sheets in Denmark. For this reason, staff recommends the measures described below to further enhance systemic resilience. Given that covered bonds backed by mortgage loans are at the heart of the financial system, risks in mortgage finance should be reduced. The mortgage finance system has a long history of good performance based on important strengths, including a "balance principle" that limits most non-credit risks. However, the rapid growth of adjustable-rate and interest-only (IO) mortgage loans have increased the share of long-term loans funded by short-term covered bonds (refinancing risk), increased the risk of payment difficulties when interest rates rise (credit risk), and reduced resilience to house price declines. It would be advisable to use regulatory policies to encourage longer bond maturities, ensure that eventual interest-rate increases are better reflected in loan pricing and approvals, and increase buffers in loans with interest-only periods, e.g. by reducing the loan-to-value (LTV) ceiling. The proposed prudential limits on MCIs' higher-risk activities are welcome. Prudential supervision is generally sound, but there is scope for further improvement. The intensity of the risk-based approach and the early and firm enforcement policy are areas of strength. However, additional resources are needed to increase the frequency of onsite inspections, including for AML/CFT supervision, and the operational independence of the Danish Financial Supervisory Authority (DFSA) should be ensured. In banking supervision, the information on operational and market risk that is reported routinely should be broadened, and systemic review of Pillar III disclosures should be implemented. In insurance supervision, a minimum solvency level should be established, and assessments of companies' governance and management--as well as the supervision of market conduct, fraud, and AML/CFT--should be enhanced Notes "December 2014." "November 12, 2014"--Page 2 of pdf "Prepared by Monetary and Capital Markets Department"--Page 2 of pdf Bibliography Includes bibliographical references Notes Online resource; title from pdf title page (IMF Web site, viewed December 10, 2014) Subject International Monetary Fund -- Denmark SUBJECT International Monetary Fund fast Subject Banks and banking -- Risk management -- Denmark Banks and banking -- State supervision -- Denmark Financial institutions -- Risk management -- Denmark Financial institutions -- State supervision -- Denmark Insurance -- Risk management -- Denmark Insurance -- State supervision -- Denmark Mortgages -- Risk management -- Denmark Mortgages -- Denmark Securities -- Risk management -- Denmark Securities -- State supervision -- Denmark Banks and banking -- State supervision Economic history Economic policy Financial institutions -- State supervision Insurance -- State supervision Mortgages Securities -- State supervision SUBJECT Denmark -- Economic conditions. http://id.loc.gov/authorities/subjects/sh85036748 Denmark -- Economic policy Subject Denmark Form Electronic book Author International Monetary Fund. Monetary and Capital Markets Department, issuing body. ISBN 9781498359542 149835954X 9781498322775 1498322778

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