Frontpage News 2013 Robust Danish bank...

Robust Danish banking sector

17 October 2013

The latest figures from the IMF confirm that the Danish banking sector is one of the most solid in the OECD. 
 
During the international financial crisis, the number of bad loans in the banks increased, because more businesses and households lost their revenue base and thus were unable to pay interest and repay their debts.
 
Bad loans are here the so-called Non-perfoming loans (NPL), often used as an indicator of the quality of bank assets. Typically, an NPL is characterised by the fact that the borrower has not paid any interest or repayments in more than three months.
 
The quality of bank assets can vary greatly within each country - there can be banks with no bad loans, and banks that are struggling with large portfolios of bad loans. As seen in Figure 1, Greece and Ireland are among the countries with a particularly high proportion of bad loans. Also, several Eastern European countries are at the higher end. Among Western European countries, Denmark is placed high.
 
"A high proportion of bad loans is a serious problem if the banks do not have sufficient capital to withstand write-downs which the bad loans could lead to," explains Niels Storm Stenbæk, Chief Economist of the Danish Bankers Association.
 
 
Figure 1: Bad loans in the banks
Note: OECD countries excl. Iceland, Germany, Finland, France, Mexico and New Zealand. NPL compared to gross lending. Latest available observation for most countries is early 2013. For credit institutions, i.e. both banks and mortgage in Denmark.
Source: Financial Soundness Indicators, IMF.
 
 

Capital

Figure 2 shows the core capital ratio (core capital comprises equity plus the so-called hybrid capital in relation to the risk-weighted assets), where the Danish banking sector, based on the latest figures from the IMF, is ranked second.
 
"The Greek banks have, for example, a high proportion of bad loans and only an average capital employed. In this context, it is worth noting that although the Danish banking sector ranked in the middle in the study when it comes to the proportion of bad loans, it has, right after Estonia, the largest capital adequacy among the OECD countries, "says Niels Storm Stenbæk.
 
If the pure equity is measured in relation to the non-weighted assets (gearing), the Danish banking sector is placed somewhere in the middle. 
 
"But this does not take into account that many of the Danish credit institutions' lending is associated with low risk. Especially, the Danish mortgage, where there is a high level of security behind," says Niels Storm Stenbæk.
 
 
Figure 2: Bank robustness
Note: OECD countries excl. Iceland, France, Chile and New Zealand. Core capital (T1) compared to risk-weighted assets. Latest available observation for most countries in early 2013. For credit institutions, i.e. both banks and mortgage in Denmark.
Source: Financial Soundness Indicators, IMF.
 
 

Good starting in Denmark

Most banks have strengthened their capital adequacy through the crisis. In Europe, it happened through both more capital (a combination of retained earnings and new capital) and lower risk-weighted assets.
 
In Denmark, recent figures show that it in particular is the lower lending (and thus risk-weighted assets) that has driven improvements in the capital adequacy. Restructuring of other assets, such as the sale of securities, may also explain something. Several banks have also been strengthened through capital increases.
 
A robust banking sector is important so that banks can continue to fulfill their primary role, namely lending to worthwhile projects.
 
"Although the latest figures from the IMF suggest that the Danish banking sector is well prepared to support businesses and households when the economy turns, it remains important that banks focus on strengthening their capital and liquidity. It is important for the financial stability and thus the confidence in banks," concludes Niels Storm Stenbæk.
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