The Council's work

The Council's work concerning systemic risks is made up of three parts. The Council monitors the financial system, makes recommendations on policy measures and evaluates policy measures. The aim is to limit systemic risks in the financial system as a whole. Systemic risks designate the vulnerabilities or imbalances in the financial system that contribute to increasing the risk of a systemic financial crisis occurring. For a risk to be described as systemic, part of or the entire system is expected to be impacted if the risk materialises.

Table of contents

What does the Council do?

  • The Council comprises a broad range of expertise with participation of independent experts as well as top level officials from Denmark’s Nationalbank, the Danish Financial Supervisory Authority, the Ministry of Industry, Business and Financial Affairs, Ministry of Economic Affairs and the Interior and the Ministry of Finance.
  • Every quarter, the Council takes stock of recent developments in the financial system. The Council reviews a number of areas that may involve systemic risks, such as excessive growth in lending to households and the corporate sector.
  • The Council conducts in-depth analyses of selected topics, e.g. the impact on the financial system of financial obligations between Danish financial corporations and of a cyber-attack.

  • The Council can issue recommendations regarding financial policy measures, e.g. to the government. Recommendations must either be implemented (comply) or the addresses must explain to the Council why they are not being implemented (explain). Furthermore, the Council may e.g. issue observations if it assesses that systemic risks may be building up, but that there is not yet a need for specific policy measures. The Council has, inter alia, recommended imposing restrictions on mortgage loans with deferred amortization and has issued observations about low interest rates.
  • Each quarter, the Council assesses whether it should recommend policy initiatives in order to mitigate or counter specific systemic risks. The Council issues a press release after each meeting, summarizing the Council’s risk assessment and outlining central discussions.
  • 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 requirements in Denmark.

  • The Council assesses whether the follow-up on its recommendations is sufficient. If a recommendation has not been implemented, the Council assesses the implications for systemic risks.

Part 1 – The Council monitors risks in the financial system as a whole

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.

Part 2 – The Council makes recommendations on policy measures on a "comply-or-explain" basis

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.

 

Table 1: Overview of the Council's recommendations, warnings and observations
Statement Date issued from the Council Assessment of follow-up
Recommendations
Activation of the countercyclical capital buffer in Greenland October 2024 December 2024
Increase in the systemic risk buffer rate of the Faroe Islands June 2024 October 2024
Activation of a sector-specific systemic risk buffer for corporate exposures to real estate companies October 2023 December 2023
Increase of countercyclical capital buffer March 2022 June 2022
Activation of countercyclical capital buffer on the Faroe Islands December 2021 March 2022
Increase of countercyclical capital buffer December 2021 March 2022
Limitation of access to interest-only loans for highly indebted borrowers June 2021 September 2021
Reactivation of the countercyclical capital buffer June 2021 September 2021
Temporary reduction of capital requirements in the Faroe Islands March 2020 June 2020
Changing the Criteria for SIFI Designation in the Faroe Islands March 2020 June 2020
Increase of the countercyclical capital buffer rate October 2019 December 2019
Increase of the countercyclical capital buffer rate March 2019 Oktober 2019
Increase of the countercyclical capital buffer rate September 2018 September 2018
Recommendation on the increase of the systemic risk buffer rate in the Faroe Islands April 2018 June 2018
Recommendation on activation of the countercyclical capital buffer December 2017 April 2018
Recommendation on limiting risky loan types at high levels of indebtedness March 2017 December 2017
Recommendation on activation of the systemic risk buffer in the Faroe Islands March 2017 June 2017
Restriction of deferred amortisation on mortgage loans September 2014 March 2015
Recommendation on phasing-in of capital requirements legislation in Denmark June 2013 March 2014
Warnings
Warning about systemic financial risks buillding up in the Faroe Islands September 2016

 December 2016
Observations
The growing prevalence of variable-rate mortgages with deferred amortisation contributes to the build-up of risk September 2022 No recipient on observations
Low interest rates and build-up of systemic risks March 2015 No recipient on observations

Low interest rates and build-up of systemic risks

September 2014

 No recipient on observations

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.

Part 3 – The Council assesses whether policy measures are sufficient

The Council assesses how the government – or other recipients of a recommendation – follow up on recommended initiatives. Recommendations must either be implemented or the addressees must explain to the Council why a recommendation has not been complied with. As a main rule, both the recommendation and the eventual explanation will be made public. The Council's assessment must consider whether the follow-up is sufficient. The Council's assessment of the follow-up on its recommendations and warnings is stated in the Council's press releases, see table 2.pressemeddelelser, see tabel 1.