Highlights

Finansiel Stabilitet Group:

Surplus of DKK 0.4 billion, mainly attributable to contributions to the Resolution Fund of DKK 1.1 billion and a negative return on the securities portfolio of DKK 0.7 billion. All funds in the Group included, the negative return totalled 3.7%.
Equity increased to DKK 23.2 billion.
Total assets increased by DKK 0.4 billion to DKK 23.9 billion.

Bank Package activities:

Surplus of DKK 12 million, reflecting the result of the continuing resolution of the remaining activities, mainly attributable to the financial crisis.
Equity was unchanged at DKK 5.3 billion.
Total assets were unchanged at DKK 6.5 billion.
As at 31 December 2022, gross loans and guarantees amounted to DKK 1.0 billion, valued at DKK 131 million, financial assets amounted to DKK 13 million and properties amounted to DKK 12 million.

Deposit Guarantee Fund:

Deficit of DKK 516 million, mainly attributable to a negative return of DKK 546 million on the securities portfolio. All funds in the Deposit Guarantee Fund included, the negative return totalled 6.9%.
Total assets and liabilities of the fund decreased to DKK 11.9 billion. Of this amount, DKK 8.4 billion was attributable to the Banking Department. Ordinary collection of contributions to the Deposit Guarantee Fund was not required in 2022 as the fund assets exceeded the statutory requirement.

Resolution Fund:

Surplus of DKK 907 million, mainly attributable to contributions to the Resolution Fund of DKK 1,124 million in 2022 and a negative return on the securities portfolio of DKK 203 million. All funds in the Resolution Fund included, the negative return totalled 3.4%.
Total assets and liabilities of the fund thus increased to DKK 6 billion.

Review and results

Finansiel Stabilitet at a glance

Finansiel Stabilitet was established during the financial crisis with the objective of contributing to ensuring financial stability in Denmark. Although the financial situation in Denmark is markedly different today than it was some 15 years ago, the objective remains to ensure that customers have access to the critical financial infrastructure even if their bank or mortgage credit institution is taken over for crisis management by Finansiel Stabilitet due to incurring financial problems.

This entails that the customers must be able to make payments and have access to a significant part of their liquid assets. In this connection, Finansiel Stabilitet also handles the task under the deposit guarantee scheme of ensuring access to deposits, which are covered up to approximately DKK 745 thousand.

As opposed to other EU countries, where small banks often enter into bankruptcy proceedings when they become distressed, the approach taken in Denmark is that banks are taken over by Finansiel Stabilitet for crisis management rather than being left to enter into bankruptcy proceedings.

In order to be able to handle Finansiel Stabilitet’s primary objective of ensuring efficient crisis management, the institutions that have an obligation to pay contributions have made payments to two funds: the Resolution Fund and the Deposit Guarantee Fund. These funds are to contribute to supporting financial stability in a crisis situation. Finansiel Stabilitet manages these funds by investing in low-risk securities and by holding cash deposits with Danmarks Nationalbank.

Finansiel Stabilitet also has as its objective to initiate resolution of the remaining activities taken over from previously failing institutions. A substantial part thereof has previously been divested, but a small portfolio of exposures remains in the form of claims from estates in bankruptcy, small loans and guarantees and unsold plots of land and securities. These activities are mainly related to banks taken over during the financial crisis. The results of these resolution activities are included in the surplus generated by the government from Bank Package activities.

In recent years, Finansiel Stabilitet has taken on a number of new tasks on behalf of the government. These tasks include the issue of guarantees for loans to buy property in rural districts and maintenance of a debt counselling scheme for former mink farmers who remain insolvent after having received compensation from the government.

The objectives of Finansiel Stabilitet may be summarised as follows:

within the scope of the Resolution Fund to contribute to ensuring financial stability in Denmark and ensuring access to critical financial infrastructure;
within the scope of the Deposit Guarantee Fund to manage a deposit guarantee scheme and thus ensure access to covered deposits;
within the scope of Bank Package activities to handle any other responsibilities and powers assigned to Finansiel Stabilitet pursuant to legislation or by the Minister for Industry, Business and Financial Affairs.

Finansiel Stabilitet is an independent public company owned by the Danish State through the Danish Ministry of Industry, Business and Financial Affairs.

Group results 2022

Finansiel Stabilitet posted a surplus of DKK 403 million in 2022 (2021: DKK 1,051 million).

The sharp increases in the global fixed income markets in 2022 led to a negative return on the managed portfolios linked to the Deposit Guarantee Fund and Resolution Fund in a total amount of DKK 749 million, comprising interest income of DKK 114 million and unrealised capital losses of DKK 863 million. Interest rates have remained highly volatile in 2023. Until 28 February 2023, Finansiel Stabilitet generated a small positive return on assets under management.

In general, Finansiel Stabilitet’s financial results can be broken down into the three funds handled by Finansiel Stabilitet, i.e. the Resolution Fund, the Deposit Guarantee Fund and government funds held under the Bank Package activities.

The Resolution Fund generated a surplus of DKK 907 million in 2022. The surplus was predominantly attributable to payment of DKK 1,124 million in contributions to the Resolution Fund. The negative return on the securities portfolio amounted to DKK 203 million for this fund. As a result of the sharp increase in interest rates in 2022, the surplus fell approximately DKK 100 million short of the expected level.

The Deposit Guarantee Fund reported a negative return of DKK 516 million as a result of a negative return on securities management activities of DKK 546 million in 2022. As a result of the sharp increase in interest rates in 2022, the surplus fell approximately DKK 500 million short of the expected level.

Bank Package activities generated a surplus of DKK 12 million for the period, which was slightly better than expected. The surplus was attributable to payments from settled lawsuits and reversed impairment losses.

The Group’s total assets at 31 December 2022 amounted to DKK 23.9 billion (2021: DKK 23.5 billion). Of this amount, the Resolution Fund accounted for DKK 6.0 billion, the Deposit Guarantee Fund accounted for DKK 11.9 billion and the government funds under the Bank Package activities accounted for DKK 6.5 billion, while a negative amount of DKK 0.5 billion related to an intra-group balance.

Total equity stood at DKK 23.2 billion, of which DKK 6.0 billion was attributable to the Resolution Fund, DKK 11.9 billion to the Deposit Guarantee Fund, and DKK 5.3 billion to the Bank Package activities. For a specification of the three funds’ income statement items, see the following sections and notes 2 and 3 to the financial statements for a more detailed account.

At 31 December 2022, the remaining net loans and guarantees amounted to DKK 0.1 billion (2021: DKK 0.2 billion), while the portfolio of financial assets amounted to DKK 10.3 billion (2021: DKK 11.6 billion) and properties amounted to DKK 12 million (2021: DKK 10 million).

The rest of the assets mainly consisted of DKK 9.9 billion held on deposit with Danmarks Nationalbank (2021: DKK 8.1 billion) and commitments made by banks, etc. in relation to the Deposit Guarantee Fund amounting to DKK 3.2 billion, which was unchanged from 2021.

Amounts held on deposit with Danmarks Nationalbank grew by DKK 1.8 billion in 2022, attributable in part to a DKK 0.7 billion reduction of the portfolio of financial assets and in part to contributions for the year to the Resolution Fund of DKK 1.1 billion.

The majority of the remaining loans and guarantees related to the segment Bank Package activities, while a minor portion of loans related to FS Finans V A/S (formerly Andelskassen J.A.K. Slagelse) and FS Finans VI A/S (formerly Københavns Andelskasse), which are wound up under the Resolution Fund. DKK 18 million of total loans and guarantees related to FS Finans V A/S and FS Finans VI A/S.

Other remaining exposures mainly consisted of receivables from estates in bankruptcy and guarantees. How fast the remaining loans will be wound up depends largely on external factors such as the progress of trustees’ estate administration and the debt recovery process. Guarantees will be gradually phased out as they mature. Finansiel Stabilitet furthermore has the ongoing task of recovering previously written-off claims, which amounted to approximately DKK 9.7 billion at 31 December 2022. In 2022, this resulted in the recognition of income of approximately DKK 31 million.

Portfolio management of the Resolution Fund and the Deposit Guarantee Fund

In 2018, Finansiel Stabilitet introduced an active investment management approach for the Resolution Fund and the Deposit Guarantee Fund. The reason for choosing a more active strategy was that Finansiel Stabilitet was no longer able to place cash deposits with Danmarks Nationalbank at 0% interest. This option ceased in 2017, and against this background, explorations were conducted with the Danish Ministry of Industry, Business and Financial Affairs as owner of Finansiel Stabilitet and with the institutions that have an obligation to pay contributions to discuss potential investment strategies, risk profiles and scenarios. In addition, the institutions that have an obligation to pay contributions were informed that a more active strategy could potentially produce a better return, but would also involve a higher risk of loss. As a result, in the event of a realisation of losses on the portfolio invested, the institutions could be required to make additional contributions to the Resolution Fund and the Deposit Guarantee Fund.

The investment strategy was based on a choice of risk profile including a fixed liquidity, interest rate and credit risk profile. The purpose was for the assets held in the funds over time to generate a return above Danmarks Nationalbank’s CD rate, but at the same time to maintain a strict focus on liquidity to ensure that the funds could be made available in the event of financial crises. In this connection, it is emphasised that the Resolution Fund and the Deposit Guarantee Fund are bound by a requirement that investments must be made in low-risk securities.

Low-risk assets are defined as securities considered by the Danish Financial Supervisory Authority to be safe and liquid as well, including government bonds issued in the EU, Danish mortgage bonds, covered bonds issued by mortgage credit institutions, covered bonds, covered bonds issued outside Denmark, senior debt in credit institutions with a rating of at least BBB/baa, other issues with a rating of at least BBB/baa, etc.

Against this background, in the period from start-2018 to mid-2020, investments were made in short-term fixed-rate mortgage bonds without a conversion option and with an interest rate risk measured at a duration of 2.5 years. Investments were generally made in tranches of DKK 1.6 billion on average. Against this background, the total liquid funds held in the Deposit Guarantee Fund were invested, and the funds held in the Resolution Fund were invested on an ongoing basis as and when contributions were claimed from the sector.

The more active investment strategy was characterised by not being tied to certain interest rate expectations, but rather based on the possibility of achieving an excess return further out the yield curve. At the same time, the intention was for the investment strategy to have a long-term perspective, meaning that short-term fluctuations would not lead to any significant adjustments to the strategy.

However, when contributions to the Resolution Fund were collected in 2020, the excess return on an investment in short-term mortgage bonds compared with the extra interest rate risk assumed was so low (the interest rate difference between the CD rate and a 2.5-year mortgage bond was very small) that it was no longer considered advantageous to make additional investments in the low-interest rate scenario. Against this background, additional contributions made to the Resolution Fund were placed as cash deposits in the following years.

Accordingly, at 31 December 2022, the amount invested by the Resolution Fund and the Deposit Guarantee Fund in short-term mortgage bonds totalled DKK 10.2 billion. Furthermore, the two funds had placed DKK 3.7 billion as cash deposits with Danmarks Nationalbank, see figure 1.

Figure 1: Investments in cash and bonds, 2017-2022

Figure 2: Portfolio return for invested funds compared with alternative placement at Danmarks Nationalbank’s CD rate, 2018-2022

Note: Compared with a 3-year benchmark from Nykredit, the mortgage bond portfolio of the Deposit Guarantee Fund and the Resolution Fund generated a comparable risk-adjusted return.

As mentioned above, the more active strategy was not driven by short-term interest rate expectations. Regardless of the fact that the investment strategy is based on a long-term perspective, the assessment in retrospect is that, until the end of 2021, the active investment strategy in short-term mortgage bonds was an attractive alternative to placing cash at Danmarks Nationalbank’s CD rate, see figure 2. Even during the major fluctuations in fixed-income markets after the COVID-19 crisis in March 2020, the investment in short-term mortgage bonds continued to generate a positive return.

In 2022, the surge in interest rates contributed to changing the scenario as it stands today. In particular in Q1-Q3 2022, the unrealised capital losses in managed mortgage credit mandates were adversely affected by a surge in government and mortgage bond yields. This development was driven by a significant increase in European and US inflation numbers, which prompted central banks to hike monetary policy rates considerably. As a consequence of interest rate increases in 2022, the return was negative at 6.8% from 1 January to 31 December 2022 compared with a return achievable by placing cash at Danmarks Nationalbank’s CD rate, which would have been negative by about 2.3%. Taking into account cash placements of DKK 3.7 billion, the Deposit Guarantee Fund and the Resolution Fund posted negative returns of 6.9% and 3.4%, respectively, in 2022.