Country Reports
2020
August 12, 2020
Denmark: Financial Sector Assessment Program-Technical Note-Financial Stability and Stress Testing of the Banking, Insurance, and Non-financial Corporate Sectors
Description: The Financial Sector Assessment Program (FSAP) work was conducted prior to the COVID-19 pandemic. This report, however, includes stability analysis and stress tests under updated illustrative scenarios to quantify the possible implications of the COVID-19 shock on bank solvency. An unusually high degree of caution must be exercised in interpreting the stress tests results and their implications or validity at the current juncture, due to heightened uncertainty around post COVID central projections and downside risks. Financial vulnerabilities were elevated on the eve of the COVID-19 pandemic. Key financial vulnerabilities included high household leverage amid high real estate valuations following a long period of loose financial conditions. There were also signs of risk taking in some sectors, such as commercial real estate (CRE), and in addition, there were downside risks to bank profitability amid the low-interest-rate environment.
August 12, 2020
Denmark: Financial Sector Assessment Program-Technical Note-Next Steps for Cross-border AML/CFT Supervision
Description: The Danish authorities’ efforts to strengthen cross-border anti-money laundering and combating the financing of terrorism (AML/CFT) supervision continue to gather momentum. Since the Fund’s publication of a Selected Issues Paper on this subject in June 20192, the Danish authorities have made significant progress, including by conducting or participating in three multinational on-site inspections of banks; developing a new institutional risk assessment model; issuing an AML/CFT on-site inspection manual; and, via Act No. 1563 (2019), amending several pieces of legislation so as to bolster the monitoring and enforcement powers of the Danish Financial Supervisory Authority (DFSA), establish additional reporting requirements for the private sector, and stiffen the penalties for violations of AML/CFT obligations.
August 12, 2020
Denmark: Financial Sector Assessment Program-Technical Note-Insurance Regulation and Supervision
Description: Denmark’s insurance sector is highly developed with a particularly high penetration and density in the life sector. Traditionally, work-related life insurance and pension savings are offered as a combined package, and life insurance companies dominate the market for mandatory pension schemes for employees. The high penetration explains the overall size of the insurance sector, which exceeds those of peers from other Nordic countries and various other EU member states. Assets managed by the insurance industry amounted to 146 percent of the GDP at end-2018, compared to 72 percent for the EU average.
August 12, 2020
Denmark: Financial Sector Assessment Program-Technical Note-Systemic Liquidity
Description: The functioning of money markets, FX swaps markets and in particular covered bond markets are crucial for the Danish financial system. Liquidity conditions in the Danish financial sector are affected by central bank operations and the lending and funding activities of financial institutions. Nearly 100 percent of the mortgage funding is obtained from market sources, using mainly domestically issued covered bonds. Correspondingly, money markets and foreign exchange (FX) swap markets are crucial to the credit intermediation process and a dislocation in these markets—the inability of financial institutions to roll over or obtain new funding or hedging positions—may have significant consequences for financial stability. Against this background, this note analyzes core funding markets for Danish banks and assesses Danmarks Nationalbank’s (DN’s) capacity to manage systemic liquidity conditions in normal times and in times of stress.
August 12, 2020
Denmark: Financial Sector Assessment Program-Technical Note-Systemic Risk Oversight and Macroprudential Policy Framework
Description: COVID-19 pandemic: The Financial Sector Assessment Program (FSAP) work was conducted prior to the COVID-19 pandemic, so this Technical Note (TN) does not assess the impact of the crisis or the recent crisis-related policy measures. Nonetheless, given the FSAP’s focus on vulnerabilities and policy frameworks, the findings and recommendations of the TN remain pertinent. While Denmark’s institutional arrangements are uncommon, the authorities have undertaken several macroprudential measures since the last FSAP. The Minister for Industry, Business and Financial Affairs (MIBFA) has decision-making power over most macroprudential tools in Denmark, which is rare in international practice. However, the Systemic Risk Council (SRC), which includes members from the Danmarks Nationalbank (DN) and Danish Financial Supervisory Authority (DFSA) plays an advisory role and has powers to give recommendations with a comply or explain mechanism. In recent years, the authorities have taken wide-ranging macroprudential policy actions in response to growing systemic vulnerabilities, which have seemed to slow down some of the riskier trends. More recently, in response to the Covid-19 crisis, countercyclical capital buffer (CCyB) has been fully released.
August 12, 2020
Denmark: Financial System Stability Assessment-Press Release; and Statement by the Executive Director for Denmark
Description: Much of the work of the Financial Sector Assessment Program (FSAP) was conducted prior to the COVID-19 pandemic. Given the FSAP’s focus on medium-term challenges and vulnerabilities, however, many of its findings and recommendations for strengthening policy and institutional frameworks remain pertinent. This report reflects key developments and policy changes since the FSAP mission work was completed, and includes illustrative scenarios to quantify the possible implications of the COVID-19 shock on the solvency of systemically important financial institutions (SIFIs). Prior to the COVID-19 pandemic, the Danish authorities had taken important steps to improve financial system resilience. The authorities had actively used macroprudential tools to bolster the robustness of the financial system. The supervision of the banking and insurance sectors had improved. Likewise, recent legislation has strengthened anti-money laundering and combating the financing of terrorism (AML/CFT) supervision. Major reforms such as a new bank resolution framework had also considerably improved Denmark’s financial safety net and crisis management frameworks.
August 12, 2020
Norway: Financial System Stability Assessment-Press Release; and Statement by the Executive Director for Norway
Description: Much of the work of the Financial Sector Assessment Program (FSAP) was conducted prior to the COVID-19 pandemic, with the missions ending on February 13, 2020. Given the FSAP’s focus on medium-term challenges and vulnerabilities, however, its findings and recommendations for strengthening policy and institutional frameworks remain pertinent. The report was updated to reflect key developments and policy changes since the mission work was completed. It also includes a risk analysis that quantifies the possible impact of the COVID-19 crisis on bank solvency. Since the previous FSAP in 2015, the Norwegian authorities have taken welcome steps to strengthen the financial system. Regulatory capital requirements for banks were raised and actions were taken to bolster the weak capital position of insurers. Alongside other macroprudential measures, temporary borrower-based measures for residential mortgages were introduced, which seem to have had some moderating impact on segments of the housing market. The resolution framework was also strengthened, with the implementation of the Bank Recovery and Resolution Directive (BRRD) and the designation of Finanstilsynet (FSA) as the resolution authority.
August 12, 2020
Norway: Financial Sector Assessment Program-Technical Note-Systemic Risk Oversight and Macroprudential Policy Framework
Description: While Norway’s institutional arrangement for macroprudential policy is uncommon, the authorities have shown strong willingness to act. The Ministry of Finance (MoF) is the sole macroprudential decision-maker in Norway, which is rare in international comparison. However, Norges Bank and the Finanstilsynet (FSA) play important advisory roles. In recent years, the authorities have taken substantive and wide-ranging macroprudential policy actions in response to growing systemic vulnerabilities—and these seem to have been effective in slowing down some of the riskier trends. The macroprudential policy toolkit is well stocked and actively used.
August 12, 2020
Norway: Financial Sector Assessment Program-Technical Note-Banking Regulation and Supervision
Description: This note presents a targeted review of selected aspects in the regulation and supervision of banks in Norway. The review is carried out as part of the 2020 Norway Financial Sector Assessment Program (FSAP) and the findings and recommendations are based on the regulatory framework in place and the supervisory practices employed at end-October 2019. The note focuses on the powers and responsibilities, independence, and resourcing of Finanstilsynet (FSA); its supervisory approach and enforcement powers and practices; key aspects of the prudential framework; and mechanisms to prevent abuse of financial services.
August 12, 2020
Norway: Financial Sector Assessment Program-Technical Note-Financial Safety Nets
Description: Norway has made substantial progress in strengthening its framework for financial crisis management and bank safety nets since the 2015 FSAP. The Norwegian authorities have implemented the EU framework. The Bank Recovery and Resolution Directive (BRRD) has been transposed into the Norwegian legal framework mainly by amendments to the Financial Institutions and Financial Groups Act and accompanying regulations. Finanstilsynet (the Financial Supervisory Authority of Norway, FSA) has been designated as Norway’s resolution authority. Resolution financing options were broadened by establishing a resolution fund. While the Deposit Guarantee Scheme Directive (DGSD) has yet to be brought into the European Economic Area (EEA) agreement, Norway has, in fact, already transposed it into the Norwegian law. This provides the Norwegian authorities with a broadened and detailed regulatory framework for dealing with weak banks.