Stress Tests

Overall, the liquidity situation of the largest Danish banks is good. Several small and medium-sized banks are preparing for the expiry of the individual government guarantees and have come far in adjusting their business models towards relying less on short-term funding. Danmarks Nationalbank's stress test of the banks' capitalisation shows that the largest Danish banks are robust. The excess capital adequacy of the four banks included in the European Banking Authority's, EBA's, capital exercise via Danish credit groups remains positive in all Danmarks Nationalbank's stress test scenarios, and Common Equity Tier 1 capital remains higher than 9 per cent, which was the requirement in the EBA's capital exercise – even if government capital injecttions are not included. Three of the small banks included in the stress test will need to strengthen their capitalisation in the baseline scenario of the stress test, and one bank is close to the threshold. The assessment is that any problems arising among the small banks can be solved via business adjustments or within the current framework for mergers and resolution without significantly influencing financial stability in Denmark.

Overall, the liquidity of the Danish banks is good, but with a considerable spread between banks. The banks should continue to prepare for a situation without government guarantees. It is important that banks make sure their business models are sustainable in the long term. Danmarks Nationalbank's expansion of its credit facilities to include, inter alia, 3-year loans and of the collateral basis to include credit claims of good quality will increase the banks' access to liquidity in the short term and ease the transition when the individual government guarantees expire. The stress test of capitalisation shows that the large and medium-sized Danish banks are able to withstand economic scenarios that are considerably more adverse than the one that is expected. One bank will need additional capital. In view of the general uncertainty and the more stringent capital re­quire­ments that are underway, the banks should continue to consolidate and strengthen their capitalisation.

The Danish financial sector as a whole is assessed to have sufficient capital and liquidity to meet the expected economic scenario. It is, however, important to have strong capital buffers as a provision against unforeseen events. The banks should continue to consolidate and strengthen their capitalisation, while also preparing for forthcoming regulation and for repaying government capital injections, if any, from 2012 onwards. At the same time, the banks should strengthen their liquidity so that they are prepared for the expiry of issuances based on individual government guarantees in 2012-13.

Content:The Banks' Resilience; Top-Down Stress Test; Bottom-Up Stress Test; Stress Testing in Cooperation between Danmarks Nationalbank and Large Danish Banks