advisory services. this is good news and will reduce the immediate risk of a doomsday scenario. but there is another potentially destabilising mechanism. if higher interest rates on adjustable - rate loans undermine the borrowers ’ ability to pay, rising interest rates may hit the mortgage banks like a boomerang by way of increased losses which could ultimately jeopardise their solvency. danmarks nationalbank ’ s analyses show that households would currently be resilient to fairly large interest - rate rises without any threat to financial stability. nevertheless, the combination of credit risk and considerable refinancing risk can be toxic, given the popularity of adjustable - rate loans. a negative spiral may arise if there is the slightest doubt about the mortgage banks ’ ability to meet their obligations to investors. in other words, the widespread use of adjustable - rate loans makes it necessary to structure the mortgage - credit business with a view to retaining investor confidence. this can be achieved by strengthening the robustness of the mortgage banks to losses by reducing loan - to - value ratios, increasing earnings – i. e. administration margins – or boosting capitalisation. in my opinion, reduction of the loan - to - value – ltv – ratio for adjustable - rate loans to, say, 60 per cent would be a good and simple way to address this challenge. and no legislation is required ; it can be achieved completely voluntarily. * * * secondly, issuance of covered bonds and covered mortgage bonds has introduced a new risk type, since the ltv ratio must be kept at 80 per cent or less throughout the maturity of the loan. if that is not the case, you must pledge top - up collateral. in this way the bonds become more collateralised as the ltv ratios must always be observed. that is positive – also in relation to refinancing risk. but the extra collateral must be financed, and it may turn out to be quite expensive. the solution is not to introduce the possibility of opting in or out of the obligations relating to covered bonds or to be more complacent about meeting the top - up requirements when housing prices fall. that could dent the credibility of the system. if doubts arise as to a mortgage bank ’ s willingness and ability to defend the status of a capital centre issuing covered bonds, investors will perceive this as an increase in the credit risk on not only that capital centre, but also the rest of the mortgage bank. and to make things worse, the

when we are really in trouble. the financial sector, on the other hand, is in a crisis. a combination of external problems and self - inflicted plagues has landed the financial sector in a situation where financial stability is at risk. looking ahead, when we discuss how to avoid a repetition of this untenable situation, it is important to remember what caused it. not least the banks'deposit deficits have made it necessary for the central government to step in and guarantee deposits and loans to the tune of kr. 4, 200 billion. the business model increasingly applied by banks since the millennium rollover is not viable in its present form. the crisis will affect the future structure and regulation of the financial sector. it is yet too early to draw detailed conclusions, the causes must be analysed first. however, there is no doubt that the capital - to - risk requirements imposed on the financial institutions will be tightened. new transparency requirements will be imposed on financial institutions, and liquidity management will, undoubtedly, also be tightened in the future. and these requirements will not be voluntary. the weaknesses in the system will not simply pass over. we need to do something about the underlying factors that have landed us in this pickle! at danmarks nationalbank we will consider how we can contribute better to strengthening financial stability in future. in this respect, we believe that we must work more closely with the danish financial supervisory authority, so that we together gain optimum insight into the risks of the banks and address weaknesses in a timely manner. we need to go on the offensive. in my opinion, the last six months have disclosed a need for more direct regulatory control of banking activities. in the very short term a new banking package is being discussed, which is to inject new capital into the banking sector. the background is concerns as to whether the banks are currently able to fulfil their necessary role in society as intermediaries between savers and creditworthy borrowers. so far, the central government's guarantee for all deposits with and unsecured claims against the banks has created a good foundation for the banks once again to obtain financing in the national and international financial markets. however, what started off mainly as a liquidity crisis could turn into a genuine credit crisis. the turmoil in the international financial markets will make it all but impossible for many banks to attract new capital. at the same time, there are many indications that danish banks will need extra capital in the near future,