and that the share of cash transactions has been declining. as mentioned before, households have so far been shielded from negative rates. negative interest rates on deposit are, however, in wide - spread use for corporates and investment and pension funds. the increased spread between household deposit rates and other sectors might be due to sectoral differences in alternatives to deposits. for households, the alternative to deposits might be cash with a zero interest rate, but incurring the inconveniences of cash. on the other hand, for large corporates, investment and pension funds the alternative might be placement on money market - like terms. banks are continuously adjusting their business models. declining margins have – on average – lowered banks net interest income. interest income now constitutes less than half of their total income. banks are compensating for the falling net interest income by expanding new business areas such as wealth management and adjusting their fees. page 6 of 8 thus, to the worried banker, i can say that the fear of falling income in a world with negative interest rates have not materialized in denmark. but he needs to keep his eyes on the road and continuously make the needed adjustments. as described in the previous slides, the danish economy is in good condition and holds the highest possible credit rating with all major rating agencies. one reason is the low level of debt. central - government debt is currently 23 per cent of gdp, and the emu debt is among the lowest in europe. as you may know, issuance of central government debt is conducted by danmarks nationalbank on behalf of the danish government. the agreed framework includes two very central funding rules that support the separation of fiscal and monetary policy : the domestic and the foreign funding rule. under the domestic funding rule, the central government borrows in kroner to cover its current budget deficit and redemptions on the domestic debt. the krone - denominated bonds and bills are held by a broad investor base – including both danish and non - resident investors. the danish insurance and pension sector is the biggest investor segment with holdings of around 50 per cent of the bonds, while non - resident investors hold approximately 40 per cent. some of them are us dollar - based investors like you. foreign funding, on the other hand, is only used to maintain an adequate foreign - exchange reserve. this means that, as a general rule, the central government raises loans in foreign currency if it is deemed appropriate to support the foreign - exchange reserve. this has not

3 shows the debt as a ratio of gdp. the high gross debt ratio, combined with the extensive use of adjustable - rate mortgage - credit loans, makes the households more vulnerable to rising interest rates. we have calculated the households'additional mortgage interest burden if interest rates rise. on average, mortgage interest expenses will increase by 1. 2 per cent of the household's gross income if interest rates rise by 1 percentage point, but there are considerable variations. some households will be financially challenged if interest rates increase by a few percentage points. this could impose losses on banks and mortgage - credit institutes. nevertheless, our overall assessment is that the development in homeowners'exposure to rising interest rates does not threaten the functioning of the financial system – or financial stability. to put it bluntly, the failure of a number of households to meet their obligations to their credit institutions is not necessarily a financial stability problem. in the past year, the imf has visited denmark in connection with its fsap, financial sector assessment program. as in other member countries, the imf assessed the structure of the danish financial system. a report will be published within a month or so. in connection with the fsap a stress test was conducted to assess whether the danish financial system is robust to cyclical changes. the basis for the stress test included danmarks nationalbank's macro model, mona, and a stress test module that we have estimated. the worst - case scenario applied by the imf involves a slowdown of the domestic economy, exacerbated by monetary - policy tightening by the ecb. house prices will fall by 30 per cent and gdp by 3 per cent over a 3 - year period. a strong cocktail indeed. the result of danmarks nationalbank's stress test is shown in chart 4, where the blue line represents the actual, historical losses to the banks, while the yellow line shows modelled calculations of the historical development, and the broken line is the expected development, given the stress scenario. according to the calculations, the banks'average losses would increase to almost 1. 5 per cent of loans and guarantees. this is somewhat lower than in the early 1990s, when losses and provisions reached 2. 5 per cent on average. overall, the danish financial system is therefore reasonably robust. nevertheless, a few banks may suffer substantially higher losses, just as there were banks in the early 1990s that lost more than 10 per cent. stress testing will be given higher priority in our future