to these targets, an investment in a danish bank or mortgage bank should yield a considerably higher return than an investment in danish government bonds. the reason for this high risk premium is not obvious to me. and certainly not if we take into account that the institutions have increased their capitalisation in recent years and are now seen as safer investments. the high targeted returns give cause for concern as they may trigger a need to increase the risks taken by credit institutions. this can be done on the assets side, e. g. via more risky lending. or on the liabilities side via higher leverage ratios. i hope that the high targets are not based on this type of strategic considerations. the credit institutions should carefully consider whether the current targeted returns are consistent with a prudent level of risk. * * * the long period of low interest rates may have had an impact on the expectations and behaviour of firms and households. the risk that interest rates may rise is disregarded. most people have clearly become accustomed to low interest rates. in relation to financial stability, this requires enhanced vigilance. if interest rates rise, this may lead to losses on the credit institutions ’ assets and the collateral behind their lending. for households, the costs of borrowing to purchase a home are historically low at present, even if the announced increases in administration margins are taken into account. how the administration margins are determined is no concern of ours. however, i would like to emphasise that there is a link between the very low level of interest rates, which also leads to a modest return on a credit institution ’ s equity, and the need for a certain level of earnings from other sources so that capital can be accumulated with a view to increasing lending. it should also be noted that improved earnings and better capitalisation of a mortgage bank benefit its customers by way of lower funding costs. this is reflected in the yield payable by the customers on the underlying bonds. combined with migration to the cities, the very low interest rates have led to a period of strong growth in house prices in some parts of denmark. adjusted for seasonal fluctuations, house prices continued to rise at a robust rate in the 2nd half of 2015 and at the beginning of this year. but there are signs of a slowdown compared with one year ago. trading activity has generally declined over the last year. this could indicate that price pressures will ease in the future. although substantial interest rate hikes are not on the cards for the time being, it is important that borrow

lars rohde : the importance of credit institutions ’ capitalisation, financial regulation development speech by mr lars rohde, governor of the national bank of denmark, at the annual meeting of the danish mortgage banks ’ federation, copenhagen, 7 april 2016. * * * thank you for inviting me to speak at your annual meeting. today i will focus on the importance of credit institutions ’ capitalisation, financial regulation developments and a few significant consequences of the very low interest rates. my key messages are : it is in everyone ’ s interest that credit institutions are well - capitalised. the risk - based approach should be retained in financial regulation. and we must have a realistic approach to how much special danish circumstances will be taken into account in future. i will also observe that the credit institutions ’ own targeted returns seem to be rather high, and that a long period of low interest rates involves considerable inherent risk. * * * my first topic is equity capital and financial regulation. robust equity is of paramount importance if people are to have confidence in a financial enterprise. the financial crisis showed that many financial institutions were insufficiently capitalised. as a result, some of them were not resilient to the losses incurred in the wake of the overheating. this inability to absorb losses exacerbated the economic downturn. since then, much has been done to increase the resilience of the financial system, both internationally and in denmark. for example, capital requirements have been enhanced. the financial system has become more robust than it was before the financial crisis. the improved capitalisation of danish credit institutions is without question an advantage, whether or not it is a result of financial regulation. there is nothing to indicate that the increased capital requirements have led to a lack of lending capacity or led to lower growth in denmark. it is also in the interest of the credit institutions themselves to be well - capitalised – and even more so after the introduction of the new eu bail - in regime. it is now the owners and creditors who must bear the losses of a distressed institution. and it is at least as important to be wellcapitalised in the eyes of the market as in the eyes of the supervisory authorities. important work is underway in relation to resolution planning for credit institutions. as regards the mortgage banks, it is chiefly a question of ensuring that the authorities can handle a distressed mortgage bank. without the use of taxpayers ’ funds. and in such a way that the lending capacity of the institution is retained