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Danish risk council calls for 0.5% countercyclical capital buffer rate

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Danish risk council calls for 0.5% countercyclical capital buffer rate

The Danish Systemic Risk Council recommended that the country's minister for industry, business and financial affairs require credit institutions to build up a countercyclical capital buffer of 0.5% of their total risk exposures in Denmark, effective from March 31, 2019.

The council assessed that risks are building up in the Danish financial system, noting signs of increased risk-taking among certain market participants in their search for yield. The persistently low level of interest rates, coupled with a strengthening upswing, rising property prices and easing of credit conditions for corporate lending, could lead to a rapid rise in credit risk, it added.

The minister, currently Brian Mikkelsen, must comply with the council's recommendation or explain why he will not do so within a three-month period. If the minister chooses to comply, affected financial institutions will have 12 months from the minister's announcement to meet the required buffer rate.

The council said it expects to recommend a further increase in the buffer rate by 0.5 percentage points within the next year if the buildup of risk does not change materially. At the same time, it said it is ready to recommend a reduction of the buffer rate, with immediate effect, if substantial stress occurs in the Danish financial system and if there is a risk of severe tightening of lending to households and firms.

The countercyclical capital buffer should be built by credit institutions during periods when risk is increasing in the financial system, and released when such risks materialize. The vast majority of affected institutions would be able to comply with the recommended buffer rate of 0.5% of their total risk exposures, as well as the expected increase of 0.5 percentage points, the council noted.