Danske Bank receives orders from the Danish FSA
The Danish Financial Supervisory Authority (the FSA) has today issued orders to Danske Bank concerning its use of the internal ratings-based approach in capital adequacy calculations (the IRB approach) and solvency need calculations.
Danske Bank does not agree with the orders and is now considering whether to appeal the decision to the Company Appeals Board.
"At Danske Bank, we find it very important to ensure that we measure the risks we incur accurately,” says Group CFO Henrik Ramlau-Hansen. “We generally wish to make a conservative assessment, but we must also be able to support business growth by providing financing on competitive terms."
"At Danske Bank, we have in recent years worked continually to develop our risk models to obtain as accurate measures of risk as possible. We have maintained a close dialogue with the FSA about the models, and we are therefore surprised that the FSA is now, on the basis of high-level comparisons with risk weights at other financial institutions, of the opinion that our models need to be adjusted. We do not agree with the FSA that the suggested adjustments would give a more accurate picture of Danske Bank’s risks. For that reason, we have proposed to the FSA that an independent third party be asked to validate our risk models."
The FSA’s orders
The FSA has given Danske Bank four orders that can be summed up as follows:
- With effect from 31 December 2013, an order to change some specific elements of the IRB model and thus increase the risk weights for corporate exposures (two orders). In this connection, Danske Bank can reduce Pillar II add-ons.
- With effect from 30 June 2013, an order to set aside additional capital in its solvency need calculations to cover risks deriving from exposures to other institutions.
- With effect from 30 June 2013, an order to remove a deduction from the solvency need.
For further information about the orders, please see the FSA’s decision.
Danske Bank’s opinion
Danske Bank is of the opinion that the IRB model we use complies fully with the requirements in the Executive Order on capital adequacy, and in fact the FSA has previously approved our IRB model and all material methodological changes.
In addition, Danske Bank is of the opinion that the FSA is not legally justified in ordering a change in the risk-weighted items on the basis of estimates and high-level comparisons with the risk weights of other banks. The IRB approach actually requires an individual assessment based on specific risks. Moreover, Danske Bank finds that the FSA compares measures at banks that are not comparable, among other things because of differences in the methods applied by the banks to calculate risks and differences in the composition of their portfolios.
Consequences of the orders
Danske Bank will begin implementing the new requirements immediately.
Over time, the net effect of the orders is a rise in risk-weighted assets of around DKK 100 billion relative to the figure for Q1 2013 (DKK 797 billion). There will also be a change in Pillar II add-ons, the net amount of which is estimated to fall by around DKK 2 billion.
Another consequence of the orders is an increase in Danske Bank’s capital requirement (Pillar I requirement) of DKK 8 billion, from DKK 64 billion to DKK 72 billion calculated at 31 March.
Calculated at 31 March 2013, the total capital ratio would be around 19.1% (the actual reported figure at 31 March 2013 was 21.6%), and the solvency need ratio under the Basel I transitional rules would be 10.1% (the actual reported figure at 31 March was 11.4%).
The orders do not change Danske Bank’s outlook for 2013, and we maintain our ambition to reach the financial targets for 2015 presented in the autumn of 2012.
The FSA’s decision will be available at www.danskebank.com/ir.
The site also provides more detailed information about the conference call for analysts and investors scheduled for Tuesday, 18 June 2013, at 10.00am.
Danske Bank A/S
Henrik Ramlau-Hansen, CFO, tel. +45 45 14 06 66
Kenni Leth, Group Press Officer, tel. +45 45 14 56 83/+45 51 71 43 68