The Financial Business Act provides the framework for the composition of the Council, appointment of members, as well as the tasks and responsibilities of the Council. In addition, the rules for appointing alternates, the secretariat services of the Council, publication etc. is laid down in the rules of procedure of the Council. The rules of procedure are laid down by the Danish Minister for Industry, Business and Financial Affairs on recommendation by the Council.
The Council's tasks
According to the law, the Systemic Risk Council shall focus on initiatives which can prevent or reduce systemic financial risks that may put pressure on all or parts of the economic development. It is important to identify systemic financial risks at an early stage so that initiatives can be taken to counter the build-up of such risks before they reach a level where it becomes impossible to avoid significant adverse effects on the financial system and the real economy.
This will imply general monitoring of the entire financial system, both in areas regulated by national or international legislation, and in areas which are less regulated today.
The Systemic Risk Council is an advisory Council commissioned to
- identify and monitor systemic risks in the financial sector in Denmark,
- make statements through observations on systemic financial risks,
- issue warnings about the build-up of systemic financial risks,
- recommend initiatives in the financial area, which may reduce or prevent the build-up of systemic financial risks, and
- be consulted on warnings and recommendations from the European Systemic Risk Board (ESRB).
In its monitoring of systemic financial risks, the Systemic Risk Council may look at how risks build up over time and across sectors. For example, it may be particularly relevant to look at the building up of risks in areas which have only recently been regulated as a result of the financial crisis, e.g. capital and hedge funds, as well as areas which have not yet been closely regulated, such as the shadow banking system, which resembles investment or banking activities, but which is not carried out by regulated credit institutions. The Council shall e.g. collect information which may contribute to monitoring systemic financial risks, including information in areas where data is not systematically being collected today.
About observations, warnings and recommendations
The Systemic Risk Council can comment on financial matters, including the development of systemic financial risks and financial regulation, which according to the Council's assessment could lead to systemic risks and thereby threaten financial stability. The Council may suggest initiatives within the financial area that can reduce or prevent the development of systemic risks. The Council's comments can differ in strength and can be in the form of observations, warnings and recommendations.
- An observation implies that according to the Council's assessment there is a risk that systemic financial risks may be building up.
- A warning implies that according to the Council's assessment there are clear indications of the building up of systemic financial risks that should be considered mitigated.
- Finally, a recommendation is a specific proposal on an initiative that will be appropriate in order to mitigate or counter identified systemic financial risks.
Observations do not trigger a duty to act for the recipients while warnings (if there is a specific recipient) and recommendations impose an obligation on recipients to act within three months. Recipients of a warning must present a report addressing the warning, including whether the warning has induced the recipients to make additional assessments, implement initiatives or the like. Similarly, the recipients of a recommendation shall either implement the initiative or present a report explaining and justifying why the recommendation has not been implemented. This means that warnings and recommendations shall be addressed according to a comply-or-explain principle. Subsequently the Council shall assess whether the acts or omissions to act and their explanations are adequate.
Warnings and recommendations will be directed towards the Danish Financial Supervisory Authority and, if it concerns legislation, to the government. According to the draft law (concerning amendment of the Danish Financial Business Act, etc.), the Minister for Business and Growth will be the designated authority for macroprudential instruments, e.g. the countercyclical capital buffer.
The Council decides by a simple majority vote among the present members with voting rights. In the event of equality of votes, the chairman will have the decisive vote. The representatives from the economic ministries and the Danish Financial Supervisory Authority have no voting rights regarding observations, warnings and recommendations directed towards the government. However, observations, warnings and recommendations directed towards the government will at their publication include a statement by the representatives from the ministries.
The different types of statements, their degrees of strength, disclosure rules, etc. are summarized in this table.
About warnings and recommendations from ESRB
The European Systemic Risk Board, ESRB, can issue warnings and recommendations to member states and national supervisors. When the ESRB issues a warning or recommendation to the authorities in Denmark, the authorities addressed shall to the extent possible consult the Council before they respond to the ESRB's warnings or recommendations.