Denmark: Financial Sector Assessment Program-Technical Note-Financial Stability and Stress Testing of the Banking, Insurance, and Non-financial Corporate Sectors

International Monetary Fund

No 2020/258, IMF Staff Country Reports from International Monetary Fund

Abstract: The Financial Sector Assessment Program (FSAP) work was conducted prior to the COVID-19 pandemic. This report, however, includes stability analysis and stress tests under updated illustrative scenarios to quantify the possible implications of the COVID-19 shock on bank solvency. An unusually high degree of caution must be exercised in interpreting the stress tests results and their implications or validity at the current juncture, due to heightened uncertainty around post COVID central projections and downside risks. Financial vulnerabilities were elevated on the eve of the COVID-19 pandemic. Key financial vulnerabilities included high household leverage amid high real estate valuations following a long period of loose financial conditions. There were also signs of risk taking in some sectors, such as commercial real estate (CRE), and in addition, there were downside risks to bank profitability amid the low-interest-rate environment.

Keywords: ISCR; CR; date of payment; return on equity; cash flow; reinvestment risk; risk capital; short-term debt; sensitivity analysis; credit risk; sovereign bond; unemployment rate; financial system; liquidity risk; banking sector; Stress testing; Covered bonds; Liquidity requirements; Credit; Insurance companies; Global; COVID-19 (search for similar items in EconPapers)
Pages: 97
Date: 2020-08-12
New Economics Papers: this item is included in nep-rmg
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