FRSGlobal : Risk Analysis and Regulatory Reporting

Regulators in Denmark

The supervisory and regulatory framework in Denmark consists of:

• National Bank of Denmark (Danmarks Nationalbank)
• Danish Financial Supervisory Authority

FRSGlobal in Denmark

Denmark has a strong financial sector governed by European Commission rules therefore banks, investment companies, and insurance companies are subject to harmonised rules across the EU. The EU is a vital framework for Denmark in terms of economy and the possibility to influence global affairs in future.

With their well developed infrastructure, highly educated and skilled workforce, Denmark also acts as the central hub for the Nordic and Baltic regions. Denmark is considered as the world’s best country for doing business due to its access to the most lucrative segments of the European Union with more than 100 million consumers.

An open economy, trade liberalisation and a technology oriented structure have enhanced the export base and competitiveness of Danish business.

Ample capitalisation of large Danish banks is a key factor in its economic growth but the country is heavily reliant on interbank lending. For a sound financial system the Danish FSA is actively working on forward-looking reforms both at international as well as local level.

Regulatory Environment — Denmark

Statutory

Financial reporting
The Danish financial reporting is based on a national GAAP. Financial reports are required to be submitted annually both at entity as well as group level and include information on assets and liabilities, and income statement. In addition, there are breakdown reports on provisions for impaired assets, interest on income and expenses etc. required to be submitted on an annual basis.

Prudential

Capital adequacy reporting
Most of the Danish reporting includes information provided in the COREP (Common reporting) templates for credit risk and operational risk based on the Basel II framework. But there are separate templates for presenting information on solvency ratio implementation and capital adequacy calculation. Certain investment firms are required to submit some additional reports on solvency to the Danish FSA on a monthly basis.

Liquidity reporting
To assess a firm’s liquidity position, the Danish FSA requires a report on the liquidity statement to be submitted on a monthly basis.

Large exposures reporting
All banks and branches of foreign banks are required to submit information on large exposures due to loans, covered bonds etc. at entity as well as group level. It also includes quarterly reporting of additional collateral submitted for covered mortgage bonds.

Statistical

Quarterly statistical reporting
Reports on the breakdown of assets and liabilities according to income statement, assets and liabilities in foreign branches, etc. are collected quarterly by the Danish FSA for statistical purposes. In addition reports on interest rate statistics are to be submitted to the Danish FSA on quarterly basis.

Transactional

MiFID reporting
Investment firms are required to report MiFID compliant transaction reports to the Danish FSA on periodic basis. These reports cover information on transactions related to financial instruments traded on a regulated market as per MiFID directives.

Suspicious Transaction reporting (STR)
In order to combat money laundering activities and terrorists financing, the Danish FSA requires all financial institutions to submit these reports to Denmark’s Financial Information Unit in case suspicious transactions are observed.

Liquidity Risk Management

With lessons learnt from the recent liquidity crunch, banks are going beyond simple static financial ratios and gap reports as measures of liquidity risk management.

Recent efforts by the European Banking Authority – EBA (formerly Committee of European Banking Supervisors- CEBS), the Basel Committee on Banking Supervision (BCBS) and the UK FSA, in terms of principles and recommendations have set greater emphasis on liquidity risk management.

Since the BCBS issued its final paper, ‘Principles for Sound Liquidity Risk Management and Supervision’, banks have been adopting liquidity stress testing scenarios to simulate bank-specific and system risks to their balance sheets. By modelling their liquidity contingency plans against such scenarios, the measure of a bank’s cash-flow survival horizon can be derived, giving a statement of the effectiveness of its plan against such crisis.

The BCBS in its recommendations proposed a completely new international liquidity and capital adequacy framework for commercial and mortgage banks in Europe, the US and Asia. The proposals will be implemented in Denmark with national discretions by way of EU regulation (CRD IV amendments). The Danish authorities have raised a few concerns related to covered bonds to the BCBS and the EC as the current proposals will significantly weaken the Danish mortgage system in several respects.

The FSA has recently introduced the concept of Supervisory Diamond for banks that sets up a number of benchmarks. One of proposals is that all banks maintain an excess liquidity coverage ratio greater than 50% and a funding ratio similar to the Basel Committee proposals on a Net Stable Funding Ratio less than one.

As per the Danish FSA, this proposal offers a logical extension of the current Liquidity Coverage Ratio and is fully consistent with the Basel standards on liquidity risk.

With our solution and experts keeping eye on global regulatory change, banks need not worry about the changes in reporting requirements.

Solvency II

Solvency II, a fundamental and wide-ranging review of the capital adequacy regime for the European insurance industry, aims to strengthen prudential regulation and improve policyholder protection.

January 1, 2013, is the expected global implementation date when all member states of the European Union (EU) will be obliged to implement Solvency II.

The project initiated by the European Commission as an advancement to Solvency I aims to enhance a revised set of EU-wide capital requirements and risk management standards.

The objective of the new system is to introduce more sophisticated solvency requirements for insurers, to guarantee that they have sufficient capital to withstand adverse events, such as floods, storms or big car accidents and offer some protection against systemic economic failures.

Currently, EU solvency requirements cover insurance risks, whereas in future insurers would be required to hold capital also against market risk (e.g. a fall in the value of an insurer's investments), credit risk (e.g. when debt obligations are not met) and operational risk (e.g. malpractice or system failure). This will help to increase their financial soundness with implementation of sound economic risk management practices in insurance industry.

With the demand for a more streamlined approach towards supervision, the Directive would enable insurance groups to be supervised more efficiently, through a College of Supervisors appointed among the supervisory authorities in the home country that would have specific responsibilities to be exercised in close cooperation with the relevant national supervisors.

The group supervisor would ensure that group-wide risks are not overlooked and would enable groups to operate more efficiently, while providing policyholders with a high level of protection. Groups that are sufficiently diversified may also be allowed to lower their capital requirements under certain conditions.

The Directive often referred as Basel II for insurers is based on a three pillar approach which is similar to the banking sector (Basel II) but adapted for insurance.

The three Pillars of this new regime are structured as below:

The new provisions of Solvency II will be adopted under the Lamfalussy process:

In January 2011 the Omnibus II Directive proposed changes aligning the level 1 text with the Lisbon Treaty and amending the text to reflect the EU’s new supervisory structure

Level 1 – The European Commission adopts formal proposal for the directive (regime’s main outline and high level standards) approved by the European Parliament and the European Council.

Level 2 – Includes introduction of delegated acts developed by the European Commission. The European Commission is advised by the European Insurance and Occupational Pensions Authority, EIOPA (formerly Committee of European Insurance and Occupational Pension Supervision)- representing all insurance supervisors throughout the EEA.

Level 3 – The EIOPA adopts guidelines and recommendations, carries out peer review, mediates and settles agreements, takes action in emergency situations, facilitates delegation of tasks and responsibilities, monitors and assesses market developments, undertakes economic analyses and fosters investor protection.

Level 4 – Enforcement of European Union law (EIOPA and European Commission). The Commission ensures all member states have implemented the legislation correctly.

Maximum harmonisation is assumed with the new Solvency II framework Directive. This means European rules will be implemented in all countries of the European Economic Area (i.e. the EU including Iceland, Liechtenstein and Norway). The EIOPA has recommended Bermuda, Switzerland and Japan to be the first countries assessed for equivalence with EU insurance regulations under Solvency II. This will facilitate the preservation of a level playing field in Europe, with equal protection of all policyholders within Europe and equivalent jurisdictions.

The new Solvency II requirements with challenges and opportunities ahead will be more risk-sensitive and more sophisticated than in the past, thus enabling a better coverage of the real risks run by any particular insurer.

Insurance companies in Europe have already started their implementation processes and self assessments before the final directive comes into force. Through this exercise and by using the results of QIS 5 companies aim to analyse the factors driving the capital requirements, judge current arrangements and assess Solvency Capital Requirements (SCR). When it comes to insurance, the Scandinavian market has its own special characteristics and an impressive degree of diversity. Large Scandinavian players like Norway, Denmark, Finland and Sweden are technically quite advanced and have the know-how to meet the Solvency II requirements without much difficulty.

The Danish FSA has welcomed the initiative of the European Commission to ensure more risk sensitive capital requirements for the European insurance sector. Denmark is the only country with 100 percent participation that is, all insurance companies and pension funds subject to Solvency II participated in QIS5.

The results highlighted that the Danish insurance industry has a slightly lower capital buffer than the current capital requirements of Solvency II but is in a positive position to meet future quantitative requirements of Solvency II.

Though the Solvency II deadline is proposed to be rescheduled to January 1, 2014, the Danish FSA has requested insurance companies to continue their preparations and consider January 1, 2013 as the final implementation deadline.