December 20, 2017 / 11:09 AM / a year ago

UPDATE 1-Denmark's banks should build up extra capital buffer, say govt advisers

(Adds details, Ministry’s response)

By Teis Jensen

COPENHAGEN, Dec 20 (Reuters) - Denmark’s banks should accumulate an extra layer of capital reserves in response to a perceived increased credit risk in its financial system, advisers to the government said on Wednesday.

The Systemic Risk Council said lenders should set up countercyclical capital buffer equivalent to 0.5 percent of their total risk exposure, including outstanding loans, from March 31, 2019.

“It is the assessment of the Council that risks are building up in the financial system,” it said in a statement.

“The persistently low level of interest rates combined with a strengthening upswing, rising property prices and easing of credit conditions for corporate lending could lead to a rapid rise in credit risk,”

The buffer aims to force banks to accumulate extra capital during boom periods on top of requirements set through other regulations, to better protect the financial system during downturns.

If the build-up of risk does not change materially, the Council said it expected to recommend a further increase of the buffer rate by 0.5 percentage points within the next year.

The council is chaired by the central bank governor, currently Lars Rohde, and includes representatives of government ministries and regulatory bodies.

Rohde has referred to the risk build-up as a “toxic cocktail”.

Business Minister Brian Mikkelsen has to comply with the Council recommendation within three months or explain why he has not done so.

The government would “assess whether the economic conditions are present to activate the buffer,” his ministry said in a statement on Wednesday.

New banking rules agreed by global regulators in the Basel Committee could have “a big impact” on Denmark’s banks, Mikkelsen said this month.

The countercyclical reserve is an option for regulators throughout the European Union. Only a handful of countries have so far placed this extra obligation on their banks, including the Czech Republic, which on Monday raised its buffer to 1.25 percent from January 2019.

Reporting by Teis Jensen, editing by Terje Solsvik and John Stonestreet

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