Denmark: Financial System Stability Assessment with reports on - IMF

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34Recommendations20. The DFSA is compliant or largely compliant <strong>with</strong> all the Basel Core Principles but, inthe opinion of the assessors, the supervisory system would benefit from the additionalmeasures listed below.Recommended Action Plan to Improve Compliance of the Basel Core PrinciplesReference PrincipleObjectives CP 1.1.Independence CP 1.2.Licensing Criteria CP 3/ Internal Control and AuditCP 14/ Remedial Measures CP 22Investment Criteria CP 5Connected lending CP 10Other Risks CP 13Bank Management Contact CP 17Supervision Over Foreign Banks’ EstablishmentsCP 25Recommended ActionA law or a provision formally establishing the DFSA isdesirable to make the organization of financial supervision in<strong>Denmark</strong> more transparent.The DFSA would have more flexibility, if it had its ownbudget.The ‘fit-and-proper’ test of the DFSA should apply to holdersof other key management position.It may be useful to develop the guidelines for internal controlsto an executive order.The FBA should require prior approval for investments in nonfinancial companies.The DFSA should consider the need for a power to deductconnected lending from capital or to require it to becollateralized.In respect of liquidity the DFSA should consider introducingthe routine monitoring of net funding requirements, stresstesting, and contingency planning for possible liquidity crisesunder various scenarios.The DFSA should consider routine meetings <strong>with</strong>management of banks where on-site inspections areinfrequent.The DFSA should consider how to assess the home countrysupervisory system when they receive an application for abanking license from a bank from a country not represented in<strong>Denmark</strong>.
35Authorities’ responseWith a few exceptions, we are broadly in agreement <strong>with</strong> the IMF assessment team.As a follow-up to the recommendations by the IMF assessment team, consideration will begiven to establish the DFSA as an independent institution by providing the agency a statutorybasis in the legislation. Correspondingly, a separation of its regulatory and supervisorybudget will be considered. In our view, how the budgetary procedure is organized is not themost important issue—instead it is essential to ensure that adequate funds are available at alltimes. A more distinct division of the budget, where the resources allocated to thesupervisory activities are separated, would also give a more clear and transparent overview.It should be noted, however, that the DFSA has been allocated increased resources as aconsequence of the Capital Requirement Directive and the Third Money-LaunderingDirective. The budgetary procedure is a political decision.Also note that the DFSA is developing the use of stress tests for monitoring the soundness offinancial institutions. The DFSA will take the mission’s comments into consideration whenfurther developing these measures. The DFSA, however, would like to note that a build up ofthe stress testing capacity, such as suggested by the IMF, would require an increase in theresources of the DFSA.We would also like to note that the new Basel II capital requirements could for institutionswhich apply for the use of the internal rating based approaches for credit risk and advancedmeasurement approach for operational risk imply potentially large decreases in the minimumcapital requirements. To ensure that any large potential decrease in capital requirement willbe gradual, the Danish regulation has included floors that set the maximum decrease incapital requirements for institutions using the advanced methods in 2007, 2008, and 2009 inaccordance <strong>with</strong> the EU Capital Requirement Directive. Furthermore, if other institutions,which are not covered by floors, should experience large decreases in minimum capitalrequirements that do not reflect the risks that the institution is subject to, the DFSA will havethe possibility of setting additional capital requirements in individual cases.The DFSA will consider issuing executive orders instead of guidelines. The benefits of suchexecutive orders will have to be viewed against the cost in administration for the supervisedentities, but there are definitely supervisory benefits in upgrading the guidelines tolegislation. Specifically regarding the recommendation to extend the field of our “fit-andproper”regulation to all key staff, and not just board members: we generally concur that itcould be useful, if the DFSA had the possibility to take action towards unfit staff members.However, it also seems an unnecessary burden on the financial businesses if such key staffmembers should have a “fit-and-proper” approval in advance. Such measures would alsoclaim a considerable part of resources from the DFSA, and it is, in the DFSA’s opinion,doubtful whether the outcome will exceed the costs.
Page 1: © 2006 International Monetary Fund
Page 4: 2ContentsPageGlossary .............
Page 7 and 8: 5ML/FTMLAMoEBMoUNAONPOOTCPEPROSCRSS
Page 9 and 10: 76. The payment and securities clea
Page 11 and 12: 9Figure 1. Nordic Countries: Reside
Page 13 and 14: 11Table 1. Denmark
Page 17 and 18: 1518. Stress test results need to b
Page 21 and 22: 19Table 5. Financial</stron
Page 23 and 24: 21Table 6. Market Shares of Major <
Page 25 and 26: 23is hence higher than the EU minim
Page 27 and 28: 25Table 7. Nordic Capital Markets,
Page 29 and 30: 27coverage of such rules to key per
Page 31 and 32: 29 ANNEX IOBSERVANCE OF FINANCIAL S
Page 33 and 34: 31Mortgage financing5. Danish mortg
Page 35: 3314. Licensing and Structure (CPs
Page 39 and 40: 376. The life sector is dominated b
Page 41 and 42: 39may be subject to more frequent f
Page 43 and 44: 41Reference PrincipleRisk assessmen
Page 45 and 46: 43 ANNEX IVREPORT ON THE OBSERVANCE
Page 47 and 48: 459. The infrastructure for retail
Page 49 and 50: 47Main findings19. The assessment d
Page 51 and 52: 49SubjectMain Findings and Recommen
Page 53 and 54: 51Regarding the recommendation to f
Page 55 and 56: 53 ANNEX VREPORT ON THE OBSERVANCE
Page 57 and 58: 5510. All securities traded in the
Page 59 and 60: 57and a zero-hour rule does not exi
Page 61 and 62: 59Table 2. Recommended Actions to I
Page 63 and 64: 61 ANNEX VIIntroductionREPORT ON TH
Page 65 and 66: 63negligible. Authorities recognize
Page 67 and 68: 6521. STR reporting by Danish finan
Page 69 and 70: 67FATF 40+9RecommendationsKEY RECOM
Page 71 and 72: 69Declaration or for non-compliance
Page 73: 71 APPENDIXStress Tests—Market Ri

Denmark: Financial System Stability Assessment with reports on - IMF

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