##sa to estimate the effect of certain macroeconomic stress scenarios against the background of the institutions'own data and models. the results were compared to the " top - down " approach, prepared by the imf and danmarks nationalbank, which focused on overall patterns in the banking sector's losses on loans and guarantees on the basis of model calculations. the next slide shows result of the " top - down " analyses performed by danmarks nationalbank. historically, a correlation can be observed between the development in unemployment, domestic lending as a ratio of gdp and the banking sector's losses on loans and guarantees. danmarks nationalbank has estimated a simple model which makes use of this correlation in the projection of the banking sector's total losses on loans and guarantees in given scenarios. the blue line represents the actual, historical losses to the banks, while the yellow line shows modeled calculations of the historical development. the broken lines show the expected development in the different stress scenarios. 3 stress scenarios with increasing severity were used. in the most severe scenario a slowdown in the domestic economy is exacerbated by a tightening of the ecb's monetary policy. this scenario implies a 30 per cent drop in housing prices in denmark and a decrease in gdp by 3 per cent over three years. the result of the stress test is that the banking institutions'losses on loans and guarantees will rise by almost 1. 5 percentage points over the 3 year period. this is somewhat lower than actual losses in the early 1990s where losses and provisions reached 2. 5 percent on average. looking ahead we have decided to further develop our stress testing abilities at danmarks nationalbank. our ambition is to learn more about how the banks affect each other and the economy in stress situations. the work on stress testing is still in its infancy. we are trying to define a stress testing architecture and in this process we are among other things taking a close look at developments in other central banks. slide 9 shows our stress test architecture. lending to households, household debt and house prices the economic conditions of homeowners in denmark are underpined by a strong housing market, and housing prices have accelerated in recent years. lately, price increases have leveled off, c. f. slide 10. the recent rising house prices especially reflect improvement in the economic fundamentals. the danish economy is growing strongly, interest rates remain low, unemployment is falling, and disposable incomes are increasing. at the same time, the introduction of new loan

of funding to make up for the difference, e. g. by issuing bonds and borrowing from other credit institutions, c. f. slide 14. we are in these weeks in the process of finalising the implementation of covered bonds legislation in denmark according to the capital adequacy directive. previously, only mortgage - credit institutions have been allowed to issue mortgage credit bonds in denmark. but as a consequence of the new legislation, this sole and exclusive right of mortgage credit institutions will be abolished and banks will be able to fund mortgage loans by issuing covered bonds ( in danish " særligt dækkede obligationer ) on a level playing field with the mortgage credit institutions. the new legislation will introduce a new possibility for banks to fund their deposit deficit and possibly thereby benefit financial stability in denmark. covered bonds are expected to benefit competition between the banking institutions and the mortgage - credit institutions. looking ahead, there is no reason to expect a downturn in the housing market in denmark in view of the currently very strong danish economy. in certain regions, downward price correction cannot be ruled out, however. for homeowners that purchased when prices peaked, a potential drop in prices would be a setback, but is hardly likely to threaten the economy or financial stability in denmark.