There are a number of factors that may be beneficial for Danske Bank under the new capital adequacy rules:
- A large mortgage portfolio, with very low expected losses over a business cycle (2 bp)
- A good diversification of credit risk between countries, customer segments and industries
- A high and stable internal capital generation
- Sound risk, capital and performance management
The Group’s credit risk has been reduced in recent years as a result of a relative increase in mortgage loans and similar loans which carry a low risk. During the same period, the Group has increased its exposure to selected global financial institutions with high credit ratings. Furthermore, the Group enters into an increasing number of collateral management and netting agreements.
On the acquisition of Sampo Bank, Danske Bank lowered its core (tier 1) minimum capital target from 6.5-6.0 to 6.0-5.5. The change was driven by the expected effects of CRD implementation. Read more about the Sampo deal.
Danske Bank's RWA
In the course of 2006, Danske Bank established internal processes for assessment of future capital requirements, the Internal Capital Adequacy Assessment Process (ICAAP), as dictated by the CRD. In December 2006, the Board of Directors approved the Group’s first ICAAP report.
Danske Bank's future RWA under Pillar I
Until now, Danske Bank's work on the internal ratings-based method was based on five-to-seven-year time horizons to determine long-term averages for estimating the risk parameters included in the calculation of the Pillar I requirements, whereas the risk of rarer cyclical situations was covered by using relevant stress scenarios under Pillar II.
Applying the IRB approach to the Danske Bank Group’s financial results for 2007 would reduce risk-weighted assets (Pillar I and Pillar II) by 23% on full implementation in 2010.
The capital target of the Group will be based on the minimum capital requirement under Pillar I and further capital requirements under Pillar II, including stress tests and rating ambitions. The Annual Report for 2007 explain further the effect of the new requirements on the Group’s capital management and financial targets.
Danske Bank's stresst test
The Group conducts a number of stress tests during ICAAP to ensure that its capital will also be adequate under unfavourable economic conditions. During the tests, the Group’s risk portfolio is exposed to more severe stress conditions than the conditions experienced during the economic downturn at the beginning of the 1990s. The increase in the capital needed resulting from these stress tests is part of the Pillar II capital requirement.
Danske Bank's capital policy
Danske Bank’s capital policy, which aims to ensure that the Group’s capital supports business growth and helps to maintain the Group’s ratings, stipulates that the Group should maintain an excess cover relative to the statutory requirement. This policy will not be changed, and Danske Bank will maintain an excess cover in the future.
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Last updated/revised on January 31, 2008