Danish central bank cautions industry to brace for ‘setbacks’

Bloomberg

Despite half a decade of negative interest rates, Denmark’s banks are making more money than ever before.
But the central bank in Copenhagen now says the industry is at risk of missing several warning signs that may be pointing toward another crisis, especially should interest rates suddenly rise.
“There is every reason to watch out for speed blindness,” the bank said in a report published on Wednesday. It urged the industry to brace for setbacks, warning that “optimism in the banking sector provides a breeding ground for increased risk-taking.”
Danske Bank A/S and other lenders operating in Denmark delivered record profits in 2016, “underpinned by low loan impairments,” the central bank said. The result follows years of industry efforts to adjust to negative rates by focusing more on operations like asset management, which generates a smaller capital requirement than
traditional lending.
Danish banks comply with European Union capital standards, and the country’s biggest lenders all passed stress tests showing they would survive a period in which loan losses would exceed those seen in 2008-2010, the central bank said. But the country’s lenders lag behind their peers
elsewhere in Scandinavia.
Among Denmark’s banks, “the capital base has not increased notably since 2013, unlike in Norway and Sweden where the banks have higher capital adequacy,” the central bank said. It also noted that Danish lenders were offering returns on equity that “appear high, given the very low level of interest rates.”
Some of Denmark’s smaller lenders would fall short of capital requirements under a severe recession scenario, the stress tests showed. “A few of the non-systemic banks are seriously challenged in the stress test, and some are unable to comply.”
The central bank didn’t identify which banks fell short of capital requirements under its severe test.