Banks in Denmark should boost their capital to avoid tightening their credit policies in the event of a substantial slowdown in economic growth, according to the country's central bank.
Banks' capital requirements will likely be tightened in the coming years due to recommendations from global financial regulators known as the Basel Committee, Danmarks Nationalbank said in its semi-annual financial stability report.
Such an economic slowdown "would lead to higher loan impairment charges and consequently lower earnings" for lenders, the central bank said.
In March, the central bank's Systemic Risk Council proposed to increase the countercyclical buffer rate for Danish banks to 1.5% from 1.0%, effective June 30, 2020. The regulator said the council expects to propose to further increase the buffer to 2% in the third quarter, adding that unless the buildup of risk in the financial system slows significantly, the council believes the buffer should reach 2.5%.
The regulator also performed a stress test on the country's banks, which found that some of the systemic banks meet their capital requirements in a severe recession scenario, while several of the small, nonsystemic banks have insufficient capital to satisfy their capital requirements.