The Council's work

The Council takes stock of developments in the financial system every quarter. The Council reviews a diverse data set covering lending trends, the credit institutions' financing requirements, etc. The data set is used to illustrate a number of areas that may involve systemic risks. For example, increased risk appetite or overoptimism among lenders, firms and households may result in excessive growth in lending and leverage that could reinforce an upswing and the subsequent downturn. The risk areas are described in the memo Monitoring of systemic risks. The Council focuses on the financial system as a whole rather than individual institutions – unless the institutions affect the entire system due to their size or complexity.

The Council supplements the risk review with in-depth analyses of selected topics that may affect financial stability. The Council has taken a closer look at the impact on the financial system of financial obligations between Danish financial corporations, at the increased use of collateral in the form of repo transactions etc. and at cyber-attacks as a systemic threat, among other issues.

The Council issues recommendations regarding initiatives in the financial area that are to be taken well before a crisis may set in, so that systemic risks are prevented or the risks can be addressed. Alternatively, the Council may publish observations or warnings if closer monitoring is required, but specific policy measures are not yet needed. Specific crisis management initiatives and e.g. fiscal and tax policy are beyond the Council's mandate.

Each quarter, the Council assesses whether there is a need for policy measures. The Council issues a press release after each meeting, summarising the Council's risk assessment and outlining central discussions. Since its establishment in 2013, the Council has issued four recommendations, one warning and two observations, see table 1 below for an overview.

The Council conducts analyses of possible initiatives in order to prepare eventual future recommendations. For example, the Council has developed a method to assess the need for imposing countercyclical capital requirements in Denmark, also known as the countercyclical capital buffer. The method is a three-stage decision-making process. Initially, the Council assesses the development in a number of key indicators; then it takes into account other relevant information. Finally, the Council concludes what the appropriate level of the countercyclical capital requirement should be. The Council has also discussed other possible initiatives; see the overview in table 2. Other countries similar to Denmark are Page 3 of 3 also in the process of building up expertise in preventing and limiting systemic risks.