Monitoring systemic risks

The Systemic Risk Council is among other things tasked to with identifying and monitoring systemic financial risks. The Council's current assessment of risks is stated in press releases published after each meeting of the Council. The method used to monitor systemic risks is described in a published note.

Financial crises affect the overall economy and welfare of society. The most recent financial crisis was the systemic crisis in the autumn of 2008. Within a short period of time, large parts of the global financial system collapsed, and together with the ensuing uncertainty the crisis resulted in a considerable loss of welfare.

Systemic financial crises are likely to occur on a regular basis in the future as well. To prevent or reduce systemic financial risks that may put pressure on all or parts of the economy , the Council is tasked with monitoring the financial system. This includes general monitoring of the entire financial system, both in areas regulated by national or international legislation, and in areas which are less formally regulated today.

Monitoring systemic risks

Purpose of monitoring

Systemic risks build up during the years leading up to a financial crisis. They are the result of complex interactions between the financial system and the real economy.

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.

 

Monitoring systemic risks

The Council's current assessment of risks

At every quarterly meeting of the Systemic Risk Council, the current development of systemic risks in Denmark is assessed. A summary of the assessment is included in the press release from each meeting.

Key messages from the latest assessment of risks

The current outlook with very loose financial conditions, increasing asset prices and prospects for a rapid economic recovery provides ground for risk build-up. Therefore, the Council recommends to the Minister for Industry, Business and Financial Affairs to reactivate the countercyclical capital buffer at a rate of 1.0 per cent from 30 September 2022. Unless risk build-up in the financial system slows down considerably, the Council expects to recommend a further increase of the buffer rate to 2.0 per cent by the end of 2021. There are also signs of risk build-up in the residential real estate market. The Council recommends to the government to restrict access to interest only mortgage loans.

Monitoring systemic risks

METHODOLOGY FOR MONITORING SYSTEMIC RISKS

Identifying systemic risks is complex. Future crises will probably be different from past crises, but no doubt certain characteristics will be the same, such as excessive credit growth. 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. In its monitoring of systemic financial risks, the Systemic Risk Council may look at how risks build up over time and across sectors.

The Systemic Risk Council monitors the build-up of systemic risks from different angles in six monitoring blocks. Within each block, is the Council asesses whether underlying forces may be contributing to systemic risks building up.

The Council has specific methods for monitoring risks relevant to applying the countercyclical capital buffer and those related to mortgages. On these two topics, the Council regularly publishes a subset of the information basis, on which the discussion of the Council relies.