Front Matter Page

© 2007 International Monetary Fund

March 2007

IMF Country Report No. 07/122

Denmark: Financial Sector Assessment Program—Technical Note—Competition in the Banking Sector

This Technical Note on Competition in the Banking Sector for Denmark was prepared by a staff team of the International Monetary Fund as background documentation to the Financial Sector Assessment Program with the member country. It is based on the information available at the time it was completed in September 2006. The views expressed in this document are those of the staff team and do not necessarily reflect the views of the government of Denmark or the Executive Board of the IMF.

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Front Matter Page

Financial Sector Assessment Program

Denmark

TECHNICAL NOTE

Competition in The

Banking Sector

September 2006

International monetary Fund

Monetary and Capital Markets Department

Contents

• Glossary

• I. Executive Summary

• II. Introduction

• III. Competition Policy in the Danish Banking Sector

• IV. Profitability and Concentration

  • A. Indicators of Profitability

    • Revenues

    • Expenditures

• B. Indicators of Concentration.

• V. Barriers to Entry and Contestability

  • A. Regulatory Barriers to Entry.

    • Prudential regulations

    • Deposit insurance requirements.

• B. Economic Barriers to Entry.

  • Consumer mobility.

  • Technological advances.

  • Foreign penetration

• Tables

• 1. Profitability Indicators of Commercial Banks

• 2. Number of Commercial Banks

• 3. Bank Concentration Ratios

• 4. Deposit Insurance Arrangements

• 5. Selected Countries: ATM and EFTPOS Penetration

• Figures

• 1. Return on Assets of Commercial Banks

• 2. Return on Equity of Commercial Banks

• 3. Spread Between Deposit and Lending Rates of Commercial Banks

• 4. Spread Between Deposit and Lending Rates of Commercial

• 5. Net Interest Income

• 6. Net Fee and Commission Income

• 7. Number of Branches of Credit Institutions

• 8. Number of Employees of Credit Institutions

• 9. Average Amount of Assets

• 10. EU: Operating Expenses of Commercial Banks

• 11. Operating Expenses of the Ten Largest Commercial Banks

• 12. Specific Provisions for Nonperforming Loans

• 13. Share of the Five Largest Credit Institutions in Total Assets

• 14. EU: Herfindahl Index for Credit Institutions’ Total Assets

• 15. Economic Development and Concentration of Credit Institutions

• Box

• 1. Administration of the Danish Competition Act

Glossary

I. Executive Summary

Denmark has a fairly competitive and efficient banking sector.¹ Measured by various indicators, efficiency of banking intermediation has been improving in recent years and compares favorably internationally. In particular, the interest spread between lending and deposit rates of Danish banks has been steadily declining, banks’ operating costs as a share of total assets have also been declining, and both Danish banks and their customers seem to be quick in adopting new technologies.

Despite the overall positive trends, competition among Danish banks may be further enhanced. The banking sector has become very concentrated, profitability of banks is relatively high and growing, and deposit mobility is low. There is room for further enhancing the transparency of bank charges. Thus there may be some scope for steps to foster more competition. Key measures to consider in this respect are the following:

• The Danish Bankers Association (DBA) and the Danish Consumers Association, in collaboration with the Danish Financial Supervisory Authority (DFSA), should continue efforts to promote the transparency of pricing and quality of different products and services offered by banks.

• The DBA, in collaboration with the DFSA, could consider developing and implementing a switching code for accounts of bank depositors in order to alleviate perceptions of the difficulties involved in switching.

• The Danish financial sector authorities and their counterparts from other Nordic countries should carefully evaluate the terms and conditions of national deposit insurance arrangements and the extent to which they may hinder competition.

• The DFSA should discourage the current banking practice of putting up defenses against hostile takeover bids (for example, Danish banks could be required to end the practice of limitation on voting rights).

• The DFSA should monitor the use of price bundling by Danish banks, with a view to ensuring that this practice does not lead to distortions, and hamper an effective competition.