SPEECH
GOVERNOR LARS ROHDE'S SPEECH AT THE
ANNUAL MEETING OF FINANCE DENMARK
CHECK AGAINST DELIVERY
6 December 2021
Thank you for inviting me to speak here today.
The pandemic and its consequences have affected our daily lives for
more than a year and a half. Now the infection rate is rising again, and
some restrictions have been reintroduced.
I'm pleased that it was possible after all to hold this traditional event this
year after last year's cancellation.
I have four items that I would like to talk about:
• Danish economy and the housing market - the time has come to
do the right thing
• Climate change - this is also a cause for the financial sector
• Money laundering - concerted action against money laundering is
necessary
• Capital adequacy requirements - good that we've nearly con-
cluded Basel III.
The pandemic has left deep marks on the economy. First, the economy
went into reverse, and it then picked up full speed again. The recovery is
generally stronger in Denmark than in many other countries - especially
in the labour market, where employment is at a record level and unem-
ployment is falling sharply and many sectors report a labour shortage.
The Danish economy is fundamentally sound, and competitiveness is
good. Therefore, the economy can withstand a period with higher capac-
ity pressure. But labour shortages are on a par with the period leading
up to the financial crisis, which is cause for concern.
It must be a common goal that the boom becomes long and does not
turn into overheating.
The housing market has also been on a roller coaster ride. The heavy
price increases that we've seen during the pandemic will certainly con-
tribute to making house prices a topic of conversation at the upcoming
Christmas lunches and family dinners. But when I sit down at the Christ-
mas table, I will not be focusing on the prices as such.
My focus is on resilience.
The resilience of the individual homeowner, the resilience of the mort-
gage credit institutions and the resilience of the Danish economy as a
whole. These are the focus areas of Danmarks Nationalbank. We neither
can nor will curb price falls or price increases in the housing market.
When house prices go up, indebtedness tends to increase too. Histori-
cally, we've seen such rising indebtedness come with a delay of one and
a half to two years. It may be different this time. We don't know yet.
But we can already see one trend: There are currently signs that home-
owners are taking higher risks. Mortgage credit institutions are increas-
ingly granting loans to highly indebted homeowners.
We can also see that the mortgage credit institutions are granting more
loans where the homeowner doesn't pay any instalments on the debt at
all - also to the most highly indebted customers. This means that the
homeowners only pay interest and contribution on their mortgage loans.
In turn, the mortgage credit institutions do not build up the same margin
of security as for loans with amortisation.
We also know that rising interest rates may have major consequences for
homeowners with variable-rate loans. Some homeowners will have to
tighten their belts even with a moderate rise in interest rates.
The general interest rate level has been decreasing for years. In fact,
many have virtually only experienced falling interest rates on housing
loans. Those of us with receding hairlines and slightly more years behind
us do recall that interest rates were higher once. That's not to say it will
happen again.
Several of the housing market structures are in dire need of an overhaul.
Let me mention three initiatives that can make homeowners, banks and
the whole economy more resilient:
Firstly, we believe that if we're to have loans with deferred amortisation,
they should only be used by the most resilient homeowners. Unfortu-
nately, Denmark has not followed the other countries in this area.
When we compare ourselves with other countries, I have to say that we
stand out: In most countries, homeowners cannot both have deferred
amortisation and as lenient a deposit requirement as we have in Den-
mark.
Secondly, it's important that the new housing taxation scheme isn't de-
layed further. Implementation of new housing taxation will restore a link
between housing tax and home value. That's a sound principle.
Thirdly, the interest deduction should be reduced. The interest deduction
actually means that the tax system rewards indebtedness. That isn't a
sound principle. With the current very low interest rates, the change will
not hurt homeowners.
As mentioned, activity in the Danish economy is high, interest rates are
low and the unemployment queue is very short. In addition to the
measures strengthening resilience for many years to come, it will not hurt
to take a little momentum out of the economy.
And yet, we've heard the argument that this isn't a good time to do these
things. In that case, there would never seem to be a good time to do the
right thing.
Also regarding climate change, it has been a problem finding a good
time to do the right thing.
But after the climate summit in Glasgow, there is, after all, reason for cau-
tious optimism on behalf of the climate. Things have been set in motion,
and there is still hope.
Climate change and the green transition are the greatest challenge facing
our society. It will affect us all. It may also impact some of the central
banks' core tasks: to ensure stable prices and financial stability. There-
fore, we've put the climate challenge on the agenda in Danmarks Na-
tionalbank.
Banks also have a role to play. They must be able to provide capital and
loans for the large-scale investments to be made by households, compa-
nies and the public sector. You've already embarked on that task.
But green loans will not do it alone. Everyone here knows that lending
money entails a risk. We have long experience with lending and why it
may cause losses. But loan losses resulting from climate change and the
green transition are unknown territory.
Climate change has, for example, meant that we're experiencing more vi-
olent weather and more storm surges. Homes in low-lying areas with sea-
side views are therefore no longer necessarily real estate agents' dream
home. The bank must also take this into account when granting a hous-
ing loan secured by a mortgage on the property.
When Denmark's green goals are to be implemented, this will create new
business opportunities. At the same time, some companies will be chal-
lenged. Will they be able to adjust their business model in time?
In future, the effects of climate change must form an extra dimension in
the banks' credit work. On that front, we all still have a lot of work ahead
of us.
Finally, we must also be honest: While climate is also a cause for the fi-
nancial sector, this isn't where the climate battle will be either lost or
won. This will instead require the politicians to make the right decisions -
nationally and internationally - and to do so soon. A general tax on car-
bon emissions is the right way forward.
Today, I would also like to address the problems of economic crime and
money laundering. And, not least, what we can do about them.
Economic crime and money laundering damage trust in the banks and
the work of the authorities. As we all now, trust is one of the most pre-
cious things we have. Hard to build up and quickly lost.
It's therefore with good reason that you've increased your focus on these
problems. This has led to a large increase in the number of reports of
suspicious transactions to the authorities. A total of more than 70,000 re-
ports were made last year. This involves large volumes of data about
bank customers and citizens. We therefore owe it to everyone to make
the best possible use of them.
In a pilot project with a major bank and a number of authorities, we've
therefore tried to use the large data volumes more smartly. The conclu-
sion was clear: Smart use of data can significantly improve the fight
against economic crime.
The results were so good that the Minister for Industry, Business and Fi-
nancial Affairs has set up a working group to present a proposal on how
the experiences can be used on a larger scale.
With concerted action, we can promote collaboration between banks and
authorities and considerably strengthen our initiatives aimed at fighting
economic crime. Mind you, without increasing the collection of data on
citizens.
But crime knows no borders either. Complex cases of money laundering
and financing of terrorism move across banks and national borders.
There is consequently a need for increased sharing of information be-
tween companies and authorities - both in and outside Denmark.
The European Commission's proposal for a new pan-European supervi-
sory authority in the money laundering area is therefore crucial and nec-
essary in the fight against economic crime. A single supervisory authority
will also strengthen financial stability.
I will move on to another recent proposal from the European Commis-
sion. Namely, the Commission's proposal on how much capital European
banks must have to be adequately cushioned.
The proposal is the last part of the Basel Committee's package of capital
adequacy requirements initiated after the financial crisis. The new set of
rules has been a long time coming. But now we've nearly reached the
conclusion for the time being.
With the first parts of the capital requirements package, the requirements
were generally tightened. That was pleasing. Both more and better bank
capital was needed.
At the same time, the set of rules has grown with new types of require-
ments. These are requirements that have been intended as a 'backstop'
to the risk-based requirement. However, supplementary requirements
also introduce a risk that the individual requirements may stand in the
way of each other.
In Denmark, for example, some large institutions cannot fully use their
capital buffers in a stress scenario. In such a situation, they will, in fact,
come into conflict with other requirements. These are now the rules of
the game, and the institutions must and need to take this into account in
their capital planning.
The new requirements are a result of the global concerns about the
banks and their risk assessments in the years after the financial crisis.
Firstly, the internal statistical models of the big banks had been shrouded
in too much mystery. Secondly, the standard methods used by the small
and medium-sized institutions weren't precise enough.
These are some of the new and old challenges that the Basel Committee
and the European Commission intend to address with the last part of the
rules. I think that the proposal contains several good elements.
Here, there is no getting around mentioning the output floor. That is the
lower limit for how low large banks can set their risk assessment - and
that regardless of how small the risks are according to their internal sta-
tistical models.
The prospects of a new floor requirement and higher capital adequacy
requirements for mortgage lending have made the whole Danish financial
sector sit up and take notice, prepared to advocate alternative solutions.
We have also been skeptical about the need for the output floor. But it's
time to move on. The output floor has been long in the making. It re-
places an old and an even more incomprehensible floor requirement.
The European Commission has also adjusted the floor requirement to a
European reality with several relaxations relative to the original proposal
from Basel.
We've previously seen some imaginative calculations of what the output
floor will cost in Denmark's GDP accounts. Let me first stress that capital
is not an expense. It's a source of funding of a bank's activities that can
cushion a bank before the crisis hits. Of course, many of you here are well
aware of this, but I think you have been quite reluctant to share this
knowledge with the general public in recent years.
In Danmarks Nationalbank, we cannot arrive at the same results as in
these calculations. Our calculations show that the revised output floor
proposed by the Commission can be expected to lead to a relatively
modest increase in the capital adequacy requirements for some large
banks and mortgage credit institutions, while others may not be affected
at all.
When we subsequently insert these increases in our macroeconomic
models, we must conclude that the pass-through to the Danish economy
is very limited.
On the other hand, it's a proven fact that financial crises have resulted in
large and persistent economic and financial losses throughout history.
There is no need to use our imagination here. These are facts.
Thank you for your attention.