Denmark: Financial System Stability Assessment with reports on - IMF

INTERNATIONAL MONETARY FUNDDENMARK<strong>Financial</strong> <strong>System</strong> <strong>Stability</strong> <strong>Assessment</strong>Prepared by the Monetary and Capital Markets and European DepartmentsApproved by Ulrich Baumgartner and Michael DepplerSeptember 8, 2006This <strong>Financial</strong> <strong>System</strong> <strong>Stability</strong> <strong>Assessment</strong> is based on two visits to Copenhagen duringNovember 7-18, 2005 and May 16-22, 2006 as part of the <strong>Financial</strong> Sector <strong>Assessment</strong> Program (FSAP).The FSAP team included: S. Kal Wajid (Mission Chief), Tonny Lybek (Deputy Mission Chief), FrancoisHaas, Vassili Prokopenko, Miguel Segoviano, Kalin Tintchev, and Jan Woltjer (all Monetary and CapitalMarkets Department); Robert Tchaidze (European Department); and Peter Hayward, Stefan Spamer,Henning Göbel, Kirsten Nordbø Steinberg, and Erik Huitfeldt (all external consultants). As part of theFSAP, the Fund also conducted the AML/CFT assessment for <strong>Denmark</strong> during February 27-March 15,2006. The assessment was conducted by Richard Lalonde (Team Leader), Paul Ashin, Margaret Cotter,Giuseppe Lombardo, and Navin Beekarry (all Legal Department). In addition to discussions <strong>with</strong> officialsand market participants, the FSAP team relied on the relevant statutes and regulations as well as selfassessments prepared by the authorities. Following are the main findings, which were discussed <strong>with</strong> theauthorities on May 22, 2006 and during the Article IV consultation discussions in June 2006:• The financial system is generally resilient and well supervised, underpinned by an effective legal andfinancial infrastructure. The recent strong performance of the sector, driven by rapidly expanding credit andan exuberant housing market will be difficult to sustain. To forestall any potential problems in the financialsector, supervisors should intensify efforts to monitor risks and use stress testing more effectively inassessing banking system vulnerability. The authorities should also make greater use of their authority torequire additional capital as appropriate in individual cases.• The mission found generally a high degree of compliance <strong>with</strong> the international financial standardsand codes. Nonetheless, the autonomy and accountability of the DFSA should be entrenched by providingthe agency a statutory basis and granting it greater budgetary autonomy. While the regulatory frameworkhas worked well in the current environment, it could benefit from upgrading the guideline on internalcontrols to an Executive Order and broadening the coverage of fit-and-proper requirements.The main authors of this report are S. Kal Wajid, Tonny Lybek, Vassili Prokopenko, Francois Haas, andRobert Tchaidze.FSAPs are designed to assess the stability of the financial system as a whole and not that of individualinstitutions. They have been developed to help countries identify and remedy weaknesses in their financial sectorstructure, thereby enhancing their resilience to macroeconomic shocks and cross-border contagion. FSAPs donot cover risks that are specific to individual institutions such as asset quality, operational or legal risks, orfraud.