This report contains a description of the supervisory activities as they pertain to credit institutions, mortgage credit institutions, insurance companies, pension funds, the stock exchange area, investment companies and investment funds in the reporting year 1997.

The Supervisory Authority reports to the Minister for Labour on the supervision of the Danish Labour Market Supplementary Pension Fund (ATP) and the Danish Employees' Capital Pension Fund (LD).

Chapter 1, Article on Credit Institutions, contains an article on credit institutions in 1997. This article was written by the Credit Risk Division at the Supervisory Authority, and consists of 6 main sections: introduction, earnings, developments in the balance sheets of credit institutions, core capital and solvency as well as a final section containing a summary.

Earnings in credit institutions have, in the past years, improved, but starting from a low level. This improvement can mainly be ascribed to the sharp reductions in realised losses and provisions for losses on bad debts as well as adjusting expenses in relation to the balance sheet.

The actual return on core capital, i.e. including price adjustments of securities and the actual realised losses and provisions for losses on bad debts, is somewhat higher than the average during the period from 1980-1997.

Compared with a no-risk investment, the basic return on core capital in the credit institution sector (based on zero price adjustments and average losses and provisions) must still be judged as being somewhat low.

During the period from 1995-1997, loans and advances in the credit institutions increased. A combination of a high lending growth and competition for customers increases the risk that control of credit quality will slacken.

Even with favourable, long-term market conditions, the credit institutions' provision account (corrective account) for future loss can hardly be reduced further. If one focuses on the effect on operations from realised loss and provisions for loss on bad debts, it appears that, today, very little is being set aside for future loss on loans under the present favourable market conditions. Writing-back of provisions from previous years is, however, being offset in the new provisions for the year. The opportunity for further entering of income must, however, be expected to decrease in the coming years. Furthermore, even under the present favourable market conditions, a significant need for new provisions for loss on bad debts does exist.

During the transition period into a recession, experience demonstrates that the need for provisions increases with a certain time lapse. The decisive factor in determining the extent to which credit institutions will, in future, be able to absorb losses during a recession is the establishment of core capital while favourable market conditions prevail. Core capital measured in relation to the total balance sheet and solvency ratio fell in 1997. This development must be seen in light of the powerful growth in loans (17% in 1997 alone). The positive bottom lines from the most recent years have increased core capital, but growth in balance sheets has been even greater.

All told, in recent years, actual as well as underlying earnings in the credit institutions have improved, but starting from a low level. With a decreasing solvency and core capital ratio, the sensitivity of credit institutions to a transition to less favourable market conditions has actually increased, particularly if the turn in market conditions coincides with falling prices for securities. The likelihood of an increase in interest rates must be seen in light of the historically low long interest rates that prevailed at the end of 1997.

Chapter 2, "Activities of the Supervisory Authority", consists of six main sections: one for each of the following areas of supervision.

1. credit institutions, etc.

2. mortgage credit institutions

3. life assurance and non-life insurance companies as well as pension funds

4. stock exchange area

5. investment companies

6. investment funds.

The stock exchange area includes securities exchanges, authorised markets, securities brokers, money market brokers, clearing undertakings, registration undertakings as well as joint credit institution data centres.

Each main section is introduced by a detailed elaboration of the market development within the individual areas of supervision.

Market developments are illustrated by means of tables. Please see the following tables:

Table 2.1.1: Excerpt of the Profit and Loss Account and the Balance Sheet, etc. of Credit Institutions 1993-1997

Table 2.1.2: Selected Average Key Figures for Credit Institutions 1996-1997

Table 2.2.1: Excerpt of the Profit and Loss Account and the Balance Sheet of Mortgage Credit Institutions 1995-1997

Table 2.2.2: Total Loans Made by Mortgage Credit Institutions and Credit Institutions 1993-1997

Table 2.2.3: New Mortgage Credit Lending in 1997

Table 2.3.1: Excerpt of the Profit and Loss Account and the Balance Sheet of Life Assurance Companies 1993-1997

Table 2.3.2: Average Key Figures for Life Assurance Companies 1993-1997

Table 2.3.4: Composition of Assets in Life assurance Companies 1995-1997 - Computed at Market Value

Table 2.3.4: Return on Assets in Life Assurance Companies 1995-1997 - Computed at Market Value

Table 2.3.5: Excerpt of the Profit and Loss Account and the Balance Sheet of General Pension Funds 1993-1997

Table 2.3.6: Average Key Figures for General Pension Funds 1993-1997

Table 2.3.7: Composition of assets in General Pension Funds 1993-1997 - Computed at Market Value

Table 2.3.8: Return on Assets in General Pension Funds 1993-1997 - Computed at Market Value

Table 2.3.9: Excerpt of the Profit and Loss Account and Balance Sheet of ATP (The Danish Labour Market Supplementary Pension) 1993-1997

Table 2.3.10: Key Figures for ATP 1993-1997

Table 2.3.11: Composition of Assets in ATP 1995-1997 - Computed at Market Value

Table 2.3.12: Return on Assets in ATP 1993-1997 - Computed at Market Value

Table 2.3.13: Excerpt of the Profit and Loss Account and Balance Sheet of LD (the Danish Employees' Capital Pension Fund) 1993-1997

Table 2.3.14: Key Figures for LD 1993-1997

Table 2.3.15: Composition of Assets in LD 1995-1997 - Computed at Market Value

Table 2.3.16: Return on Assets in LD 1995-1997 - Computed at Market Value

Table 2.3.17: Excerpt of the Profit and Loss Account and Balance Sheet of Direct Non-life Insurance Companies 1993-1997

Table 2.3.18: Average Key Figures for Direct Non-life Insurance Companies 1993-1997

Table 2.4.2: Excerpt of the Profit and Loss Account and Balance Sheet of The Danish Securities Centre (VP) 1993-1997

Table 2.5.1: Excerpt of the Profit and Loss Account and Balance Sheet of Investment Companies 1996-1997

Table 2.6.1: Excerpt of the Profit and Loss Account of Investment Funds which either Distribute the Profit or Appropriate the Profit to Increase the Capital 1993-1997

Table 2.6.2: Excerpt of the Balance Sheet of Investment Funds which either Distribute the Profit or Appropriate the Profit to Increase the Capital 1993-1997

Following the sections on market developments, there is a discussion of supervisory activities within the individual business areas. In conjunction with this discussion, particular supervisory activities in the year of reporting are mentioned.

Furthermore, chapter 2 contains summaries, within the individual business areas, of the number of companies under supervision.

It also contains information on newly established companies, changes of name, mergers and takeovers as well as the activities of foreign companies operating in Denmark.

With regard to credit institutions, the number of Danish credit institutions, including 4 credit institutions at the Faroe Islands and 1 in Greenland, totalled 195 as of 31 December 1997; 15 foreign credit institutions had a branch in Denmark as of 1 April 1998.

As of 1 April 1998, 121 foreign credit institutions had given notice that they were offering cross-border services in Denmark.

9 foreign credit institutions had, as of 1 April 1998, established representative offices in Denmark.

The supervision of mortgage credit institutions covers 9 institutions including BG Kredit A/S.

In 1997, the following number of companies had the right to carry on life assurance and pension fund business in Denmark:

54 public limited companies

1 mutual company

1 foreign company represented in Denmark

4 reinsurance companies

31 general pension funds

66 company pension funds

Moreover, as of 1 April 1998, the following number of companies had the right to operate life assurance undertakings in Denmark.

4 foreign EU/EEA insurance companies were registered and noted as life insurance undertakings in Denmark in the form of a branch.

67 foreign EU/EEA insurance companies were registered and noted as providers of services, from headquarters, under the Third Life Assurance Directive.

3 foreign EU/EEA insurance companies were registered and noted as providers of services, from a branch, in another EU/EEA country, under the Third Life Assurance Directive.

Furthermore, the following number of companies was authorised to carry on non-life insurance undertakings in Denmark in 1997:

74 public limited companies and 1 war risk insurance association

86 mutual companies

3 branches of foreign companies.

As of 1 April 1998, the following number of companies has the right to operate non-life insurance undertakings in Denmark:

37 foreign EU/EEA insurance companies operating non-life insurance companies in the form of a branch.

170 foreign EU insurance companies noted as "major risk" providers under the Second Non-Life Insurance Directive.

213 foreign EU/EEA insurance companies were registered and noted as providers, from headquarters, under the Third Non-life Insurance Directive.

36 foreign EU/EEA insurance companies were registered and noted as providers, from a branch in another EU/EEA country, under the Third Non-life Insurance Directive.

In the report in chapter 2 concerning supervision of workmen's compensation insurance (industrial injuries insurance), it is stated that 19 companies are, as of 1 April 1998, authorised to underwrite workmen's compensation insurance directly.

Investment companies, including stock broker companies, numbered 8 as of 31 December 1996. As of 31 December 1997, this number totalled 35. As of 1 April 1998, the number of investment companies was 34.

2 foreign investment companies investment companies had, as of 1 April 1998, either set up, or had announced that they would set up, operations in Denmark.

638 foreign investment companies had, as of 1 April 1998, announced their intention to operate cross-border services in Denmark.

At the end of 1997, 54 investment funds were registered at the Supervisory Authority. As of 1 April 1998, the number of investment funds was 60, of which 4 were special funds.

At the end of 1997, 2 foreign EU investment institutions were noted as entitled to market their shares in Denmark under section 8 of the Danish Investment Associations Act.

Chapter 3 "International Cooperation" contains a detailed description of the work of the Supervisory Authority within the European Union.

This is followed by a brief discussion of the Supervisory Authority's cooperation with the other Nordic countries: Finland, Iceland, Norway and Sweden.

The chapter concludes with a discussion of the Supervisory Authority's cooperation with countries outside of the European Union and the Nordic countries.

The chapter begins with a discussion of the work done in the Banking Advisory Committee ("Det Rådgivende Bankudvalg") within credit institutions. This committee was established under article 11 in the first council directive of 12 December 1977 on the coordination of laws, regulations and administrative provisions relating to the taking up and pursuit of the business of credit institutions (77/780/EEC). Henrik Bjerre-Nielsen, Director General of the Supervisory Authority, is a member of the committee which meets four times per year. In 1997, the realisation of the Single Market in the financial sector continued to leave its stamp on the work of the committee.

Director General Bjerre-Nielsen is also a member of the Banking Supervisory Sub-Committee under the European Monetary Institute (EMI). The work in this group has been dominated by preparations for the third phase in the Economic and Monetary Union with its common central bank and common currency.

Furthermore, the Supervisory Authority participates in the work of the "Groupe de Contact" which meets three times per year. This group draws up reports for the Banking Advisory Committee as well as for the Banking Supervisory Sub-Committee.

Together with the Danish public prosecutor for serious economic crime, the Supervisory Authority participates in a contact committee, set up by the Commission under article 13 in council directive of 10 June 1991 on prevention of the use of the financial system for the purpose of money laundering (91/308/EEC).

The Supervisory Authority also participates in the Technical Group of the Commission on the Interpretation of the Banking Directives.

There is a subsequent discussion of the work done in the Commission's working group on amending the solvency directives and the capital adequacy directive. In 1996, the Commission submitted a proposal for amending the first banking directive (77/780/EEC), the Solvency Ratio Directive (89/647/EEC) and the Capital Adequacy Directive (93/6/EEC). A Common Position has been arrived at, and the Directive is expected to be passed in 1998.

Finally, there is a status report on the work being done in the Commission's working group on electronic banking and in a working group set up by EUROSTAT on financial services excluding insurance.

Within the area of insurance, chapter 3 contains a description of the present state of work in the insurance committee established pursuant to Council Directive of 19 December 1991 on setting up an insurance committee (91/675/EEC). The insurance committee meets three times a year, and is made up of no more than two representatives from each member state as well as representatives from the Commission. The Danish members are Henrik Bjerre-Nielsen, Director General of the Supervisory Authority, and Torben Garne, Head of Division at the Danish Ministry of Economic Affairs.

There is then reference to an EU supervisory conference and the Supervisory Authority's participation in the cooperative efforts amongst the EU supervisory authorities, efforts which are based on the non-life insurance and life assurance directives. In 1997, the Supervisory Authority participated in a working group in Paris, established by the supervisory conference, on the revision of the protocol of cooperation for the insurance directives. This revised protocol was passed at the supervisory conference held at Siena in October, 1997.

Moreover, a status report of the following work is provided: 1) a directive proposal on the winding-up of insurance companies, 2) the Commission's working group on the codification of the life assurance directives and the non-life insurance directives, and the EUROSTAT working group on insurance statistics.

There is a status report of the work being done in the Council's working group on amending Directive 85/611/EEC on the coordination of laws and administrative provisions relating to undertakings for collective investment in transferable securities (UCITS).

There follows a description of the Supervisory Authority's participation in a number of contact groups, etc.

Furthermore, there is a description of the Supervisory Authority's membership in the informal EU group consisting of Heads of Stock Exchange Supervisory Authorities which held three meetings in 1997. This group restructured in December, 1997, and changed its name to FESCO (Forum of European Securities Commissions).

There is then a separate point dealing with a proposal for a directive on settlement finality in payment and securities settlement systems.

The next part of the chapter is a description of the state of affairs concerning the sock exchange area, investment companies and UCITS.

With regard to Nordic cooperation, the Supervisory Authority is a member of the Nordic Group for Securities Markets ("Den Nordiske Værdipapirmarkedsgruppe"). The other members are the supervisory authorities from Finland, Iceland, Norway and Sweden. This group usually has two meetings per year, during which the members discuss developments and legislation within the stock exchange area.

In conjunction with the informal Nordic supervisory cooperative efforts, a group consisting of representatives of each supervisory authority's market monitoring / insider units has been established. This group met three times in 1997 during which the individual authority's experience with insider cases was the main item on the agenda.

Within the area of IT risk,the supervisory authorities from Denmark Finland, Iceland, Norway and Sweden held a series of meetings during which they discussed such subjects as legislation, supervisory methods and risks in connection with new technology (including Internet and home banking), system restructuring (e.g. the year 2000 and EMU / EURO) and outsourcing of IT services.

With regard to international cooperation outside the framework of EU and the Nordic countries, the Supervisory Authority would like to emphasise that the Supervisory Authority, under the auspices of the OECD, participates in two annual meetings in OECD's insurance committee.

A description follows of the WTO/GATS agreement. The basic principle in GATS, Most Favored Nation Status, is that deregulation vis à vis one country will necessarily benefit all WTO countries. An agreement on financial services expired at the end of 1997. In December 1997, this limited agreement was replaced by a permanent agreement on trading of financial services. This agreement encompasses 70 countries including all the EU countries. Financial markets in EU are already among the most open and deregulated financial markets in the world. This permanent agreement does not entail further deregulation in Denmark.

Together with the Danish public prosecutor for serious economic crime and the Danish Ministry of Foreign Affairs, the Supervisory Authority participates in meetings in the Financial Task Force (FATF) concerning money laundering.

There is then reference to the MAI Agreement (The Multilateral Agreement on Investments) and the Supervisory Authority's participation in an informal working group concerning financial issues.

Finally, mention is made of the Supervisory Authority's membership of the International Organization of Securities Commissions (IOSCO).

Chapter 4, "Participation in Councils, Boards and Committees",

describes the work done in various committees and working parties established by the Minister in charge of the particular area or the Supervisory Authority or, in some cases, by an institution being supervised. The following working parties are included:

- The committee on the financial sector after the year 2000

- The committee on long-term savings within the financial sector

- The working group on insurance brokers

- The committee on financial crime and computer crime

- The working group on investor guarantee schemes

- The working group on a new Executive Order on the performance of auditing within credit institutions

- The Supervisory Authority's Advisory Committee on Accounts for credit institutions, etc.

- The working group on accounting rules for insurance companies and pension funds

- The working group on the principle of balance in the Act on Mortgage Credit

- The Greenland Committee

- The committee on dematerialised registration in the land register

- The committee on maximum guaranteed basic interest resulting from the Third Life Assurance Directive

- The committee on the appointed actuary's function in life assurance companies and pension funds

- The committee on possible payments for interest guarantees.

Chapter 5, "Publications". Every year the Supervisory Authority publishes a report on its activities as well as a collection of publications with detailed account information and statistical material on the individual areas of supervision.

In addition, the Supervisory Authority annually publishes an up-to-date edition of the publication "Aggregate Figures from The Danish Financial Supervisory Authority" ("Hovedtal fra Finanstilsynet"); some of the information which it contains is a summary of the financial sector's share holdings and share in the capital of listed companies.

Taken together with the publication on aggregate figures, the publications containing statistical material assume the quality of a statistical yearbook for the financial sector.

Furthermore, in 1996, the Supervisory Authority published an introductory folder on itself.

On 4 June 1997, the Supervisory Authority opened its Internet homepage. The address is http://www.ftnet.dk/

On the same day, the Supervisory Authority published its annual report for 1996 in a paper version as well as on Internet.

The Supervisory Authority will, in future, continue to publish the annual report itself as a paper version as well as on Internet.

However, the Supervisory Authority intends to publish statistical reports on the individual areas of supervision as well as the booklet containing aggregate figures exclusively on Internet starting with the reporting year 1997.

Chapter 6, "The Strategy of the Supervisory Authority: the Main Tasks, Organization and Staff of the Danish Financial Supervisory Authority", describes the main tasks, organisation and staff of the Supervisory Authority.

Chapter 6 starts by emphasising that the framework within which the Supervisory Authority works changes over time. For example, there can be a specific development in the financial sector, an amended legislative complex, IT developments or a change in allocation of resources.

As do all other organisations, the Supervisory Authority has to take account of such changes in its framework. For example, evaluations must be made of the extent to which changes require changes in allocation of resources or development of new supervisory instruments.

Based on such evaluations, the Supervisory Authority draws up 4-year strategy plans with a view to achieving its goals in light of expected and actual developments in the Supervisory Authority's framework.

The management of the Supervisory Authority has upgraded the priority of this work with its establishment of a Financial-Statistical Division. Among its tasks, this division is responsible for working with the Supervisory Authority's strategy as a secretariat function for the management. Its work consists partly in drawing up proposals for changes in the Supervisory Authority's strategy, and partly in following up on the strategic projects which have been started.

In 1998, work is being done on 30 strategy projects in the Supervisory Authority. Most of these projects are scheduled for completion before the end of 1998 at which time new projects will be started in the Supervisory Authority's on-going efforts to fine-tune its strategy.

By Royal Assent of 30 December 1996, it was decided to transfer legislation and cases concerning regulation and supervision of financial undertakings from the Ministry of Business and Industry to the Ministry of Economic Affairs.

The Supervisory Authority thus became, together with the Ministry of Economic Affairs, one of the three institutions that constitute the aggregate area of responsibility for the Minister for Economic Affairs; the other two are the Economic Council and Statistics Denmark.

The Danish Labour Market Supplementary Pension (ATP) and the Danish Employees' Capital Pension Fund (LD) fall under the Minister of Labour. Danmarks Skibskreditfond falls under the Minister for Business and Industry.

The Supervisory Authority acts as secretariat for the Danish Insurance Council (Forsikringsrådet), the Danish Securities Council (Fondsrådet) and the Danish Pension Market Council Pensionsmarkedsrådet), see below.

The Insurance Council is that body which makes decisions in test questions, new creations within the insurance area, major cases, etc. while the Supervisory Authority attends to daily administrative matters. A more precise breakdown of the respective services provided by the Insurance Council and the Supervisory Authority can be found in Executive Order No. 500 of 29 May 1997.

The Danish Securities Council was established under Act no. 1072 of 20 December 1995 on securities trading, etc. According to section 83 in this act, the "Danish Securities Council shall be instrumental in promoting a smooth Danish securities market, which is so efficient, transparent and competitive that it will be attractive to issuers, investors and securities dealers and which will comply with international standards." The Supervisory Authority acts as secretariat for the Securities Council. In executive order no. 254 of 28 March 1996, the rules of procedure for the Securities Council are laid down.

The Danish Pension Market Council. As a consequence of a recommendation from the committee on more democracy and openness in the investment decisions made by pension institutions, etc., cf. report no. 1306 of December 1995 from the Ministry of Economic Affairs, the Government decided to set up a pension market council. The council's task is to contribute to support on-going public discussions of openness in the investment policies of pension institutions as well as to ensure continued focus on the investment decisions made by the institutions and development of member influence.

As of 1 July 1998, the Supervisory Authority consists of a management and 13 divisions. The management consists of:

Director General: Henrik Bjerre-Nielsen

Deputy Director General: Peter Sylvest Larsen

Deputy Director General: Erik Johansen

Deputy Director General: Flemming Nytoft Rasmussen

Assistant Director General: Susanne Kortsen

 

Chapter 7, "Appeals Boards and Deposit Guarantee Scheme", contains, among other things, a list of appeals boards empowered to deal with complaints concerning the financial sector.