DANMARKS NATIONALBANK ANNUAL REPORT 2017 DANMARKS NATIONALBANK ANNUAL REPORT 2017 DANMARKS NATIONALBANK ANNUAL REPORT 2017 3 Annual Report 2017 This report is based on information available up to 7 March 2018. See also www.nationalbanken.dk Explanation of symbols: - Magnitude nil 0 Less than one half of unit employed • Category not applicable … Data not available Details may not add up because of rounding. ISSN (Online) 2446-3019 Contents 7 Foreword Report of the Board of Governors Report of the Board of Governors on the activities of Danmarks Nationalbank 10 Monetary policy, financial markets and the real economy 12 The stability of the financial system 13 The Systemic Risk Council 13 Secure payments 14 Result for the year 2017 Organisation 18 Staff 20 Danmarks Nationalbank’s representation on committees, in international organisations, etc. 21 Organisation chart Risk management 22 Financial portfolios 24 Risks on loans to banks and mortgage banks 24 Collateral basis and lending in 2017 24 Operational risk 25 Insurance strategy Accounts of the year 2017 29 Accounts Foreword Danmarks Nationalbank was established in 1818 and regulate the traffic in money and the extension of its 200th anniversary will be celebrated during 2018 credit”. The description of the bank’s tasks also still with a number of activities targeted at the bank’s applies. stakeholders and the general public. Danmarks Nationalbank maintains a safe and secure Danmarks Nationalbank was established in order to currency system by focusing on stable prices and bring order to the currency system after the state secure cash and electronic payments, and by general bankruptcy in 1813. It was not until 1936 that the monitoring of the stability of the financial system. bank became a self-governing institution which lays down monetary policy independently of the Govern- In addition to the accounts, the 2017 Annual Report ment and the Folketing (Parliament). The Danmarks presents an overall description of Danmarks Nation- Nationalbank Act from 1936 is still in force. albank’s activities within those three areas. Section 1 of the Act states that the object of Dan- For more detailed descriptions, reference is made to marks Nationalbank is “to maintain a safe and secure the publications and reports issued during the year, currency system in this country, and to facilitate and and to Danmarks Nationalbank’s website. Copenhagen 7 March 2018 Lars Rohde Per Callesen Hugo Frey Jensen Chairman DANMARKS NATIONALBANK ANNUAL REPORT 2017 7 8 DANMARKS NATIONALBANK ANNUAL REPORT 2017 REPORT OF THE BOARD OF GOVERNORS DANMARKS NATIONALBANK ANNUAL REPORT 2017 9 Report of the Board of Governors on the activities of Danmarks Nationalbank Monetary policy, financial markets and the real economy The aim of Denmark’s monetary policy is to central government no longer has loans to other ensure a fixed exchange rate vis-à-vis the euro. countries. The formal basis for the Danish fixed exchange rate policy is the European Exchange Rate Danmarks Nationalbank made no changes to the Mechanism 2, ERM2. The fixed exchange rate monetary policy interest rates in 2017 and the be- policy is a cornerstone of the Danish economy ginning of 2018. This means that the interest rate on and has contributed to ensuring stable prices. certificates of deposit is still 0.65 per cent, cf. Chart At the beginning of 2017, the Danish central 2. The monetary policy interest rate spread to the rate against the euro – and previously the European Central Bank, ECB, was unchanged at -0.25 D-mark – had been unchanged for 30 years. percentage point. The Danish money market was calm in 2017, with low and stable money market rates. In 2017, the krone’s rate against the euro was stable, and slightly stronger than the central rate, cf. Chart Government and mortgage yields were stable and 1. The monetary policy interest rate spread to the generally very low in 2017, among other things as a euro area was unchanged, and the foreign exchange consequence of the ECB’s expansionary monetary reserve was stable. Danmarks Nationalbank only policy for the euro area. The 30-year mortgage yield intervened in the foreign exchange market to a very was around 2 per cent at the end of the year, cf. limited extent. Chart 3. This is close to the lowest level ever. The 10- year Danish government bond yield was around 0.5 In 2017, Danmarks Nationalbank purchased foreign per cent for most of the year, while the 2-year yield exchange for kr. 10.3 billion net in connection with was around -0.6 per cent. intervention in the foreign exchange market. In over- all terms, the foreign exchange reserve increased by The development in Danish government bond yields kr. 5.8 billion, to kr. 461.8 billion at year-end. generally matches the development in the equivalent German yields. The 10-year yield spread to Germany In recent years, the central government has not narrowed in 2017 when a new primary dealer model issued any foreign bonds, and in 2017 the central was introduced. This scheme has given a group of government’s last foreign bonds were redeemed. In banks an incentive to quote tighter prices for Danish December, Ireland prematurely redeemed the Danish government securities, which has contributed to a government loans granted in 2012-13. After this, the more liquid government securities market. In addi- 10 DANMARKS NATIONALBANK ANNUAL REPORT 2017 Stable krone on the strong side of the central rate Chart 1 Kroner per euro 7.25 7.35 Market rate 7.45 Central rate 7.55 Fluctuation limits (+/- 2.25 per cent) 7.65 99 01 03 05 07 09 11 13 15 17 Note: Reverse scale. Source: Danmarks Nationalbank. Unchanged monetary policy rates in 2017 Chart 2 Per cent 2.0 1.0 Lending rate 0.0 Current account rate Cita swap interest rate Interest rate on certificates -1.0 of deposit 11 12 13 14 15 16 17 Note: 1-month Cita swap rate. Source: Thomson Reuters Datastream, Danmarks Nationalbank. Low level of interest rates in 2017 Chart 3 Per cent 6 5 4 3 2 Mortgage yield, 30-year 1 Government bond yield, 10-year 0 Government bond yield, 2-year -1 11 12 13 14 15 16 17 Note: Government bond yields are par yields. The mortgage yield is based on the benchmark bond. Source: Nordea Analytics, Thomson Reuters Datastream. tion, the demand for mortgage bonds from abroad albank assesses that the political agreement on contributed to narrowing the spread between long- future housing taxation rules and the tightening of term government bonds and mortgage bonds. the good practice rules will result in a more geo- graphically-balanced housing market in the future There was broad-based growth in the global econ- and strengthen opportunities to maintain a balanced omy in 2017, with an expansion of world trade. In upswing. the euro area, the upswing picked up speed from the year before. The growth in consumer prices in the euro area and the USA was stronger than in preced- ing years. The annual rate of increase in the euro The stability of the financial system area remained below 2 per cent. Wage increase rates were moderate across the board. Danmarks Nationalbank contributes to In Denmark, the balanced upswing continued, and ensuring the stability of the financial system the economy was heading towards a boom. Gross by analysing the financial sector, analysing domestic product, GDP, increased by 2.1 per cent. and assessing systemic risks, and making This exceeded the growth potential, which is limited recommendations. In addition, Danmarks by such factors as the demographic development. Nationalbank oversees the payments infra- Danmarks Nationalbank pointed out that in such a structure, produces financial statistics and situation, fiscal policy should contribute to ensuring provides secretariat services to the Systemic that demand does not exceed available capacity, Risk Council. since experience shows that overheating can be sudden and strong. The labour market continued to improve in 2017, The positive economic development in 2017 was and there were clearer indications of a shortage of reflected in increasing profits in the financial sector. manpower. While employment continued to rise, The favourable performance of the systemically im- unemployment flattened out close to the cyclical- portant financial institutions, SIFIs, can be attributed ly-neutral level of around 4 per cent of the work- to extraordinarily high value adjustments and very force. Previously adopted reforms to gradually raise low loan impairment charges. Core earnings have the retirement age were phased in, contributing to been declining since 2015, which is primarily related an increase in the labour supply and covering part to lower net income from interest. of the increased demand for manpower. Danmarks Nationalbank’s stress test of the banks The wage increase rate was still moderate and showed that all of the systemically important fi- more or less in line with the rate of increase in nancial institutions, comprising Danske Bank, Jyske the countries with which Denmark traditionally Bank, Sydbank and Nykredit Bank, can still fulfil competes. Consumer prices increased by 1.1 per the minimum capital requirements in the event of cent in 2017. This exceeded increases in previous a hard recession. The test also showed that a few years and was in line with the development in the institutions would have a limited need for extra euro area, while there was continued sound growth capital in terms of the overall capital requirement, in real wages for most categories in the labour including capital buffers. In December 2017, Spar market. Nord was designated as a systemically important financial institution. The current account surplus was approximately 8 per cent of GDP. In particular, this reflects the consolida- The Danish banks have generally built up consider- tion of households and companies after the financial able capacity to increase their lending.