Mitigation of DNB's Financial Risks

DNB’s mitigation of the financial risks of monetary policy

The conflicting interests are due to DNB’s mitigation of the financial risks of monetary policy: additional financial buffers to protect its long-term financial position are made at the expense of the short-term profit distribution to the State. DNB has formed a provision of €1.5 billion in recent years to cover the risks arising from the European Central Bank’s bond purchasing programme. Guarantees given by the State as the shareholder of DNB mean that the profit distribution will not be lowered but they are not entirely risk free.

What information is available to the minister?

The minister’s relationship to DNB and its mitigation of monetary policy risks is not clear. The many laws and regulations that apply mean it is uncertain what information the minister must receive to fulfil his various responsibilities or what information he must provide to the House of Representatives. The Court of Audit presented its findings in a report entitled Mitigation of DNB's Financial Risks – The Role of the Minister of Finance published on 19 February 2019.

Extra buffers necessary

DNB carries out its monetary tasks completely independently. To do so it has formed financial buffers to mitigate the risks it incurs The buffers were increased from €7.8 billion to €9.4 billion between 2012 and 2017. As the shareholder of DNB, the Minister of Finance must ensure that the buffers are adequate. The minister was closely involved in and made constructive comments on the measures DNB took to offset the growing risks, in part because the additions to the buffers were at the expense of the profit distributions to the State whereas the guarantees given by the shareholder to DNB were not. How the minister should weigh up the conflicting short-term interests of the shareholder and the long-term interests of the guardian of the public purse and the independent performance of DNB’s monetary tasks is not explicitly documented.

Additional guarantee scheme

An additional guarantee of €5.7 billion that the State gave to DNB in 2013 on account of the increased financial risks arising from the support provided to Greece, Portugal and Cyprus was discussed in detail in the House of Representatives at the time. The guarantee expired in March 2018, by which time DNB had formed adequate buffers. The guarantee did not come at a financial cost to the State.

Purchasing programme by the ECB

The European Central Bank (ECB) has substantially increased its debt portfolio in recent years. It has undertaken a large scale programme to purchase government bonds and has subsequently bought up corporate bonds in order to stimulate the eurozone economy. The financial risks to DNB, as one of the participating central banks in the euro system, have increased accordingly. DNB informed the minister it needed an additional reserve on top of its normal capital buffer. At the end of 2016, this additional reserve was estimated at €2.7 billion. It has inevitably had an effect on the profit distribution to the State. To date, the State has received €1.5 billion less dividend from DNB. The ministry and DNB are currently discussing alternatives to the current agreement that 95% of DNB’s profit should be distributed to the State as shareholder.

Document how the minister should deal with conflicting interests

The Minister of Finance responded to the Court of Audit’s findings by letter. In it, he took a step towards clarifying his role as shareholder of DNB and DNB’s implementation of its monetary tasks. In the Court of Audit’s opinion, the description would be more persuasive if the minister explained what information he needed in his capacity as shareholder and what information in his capacity as guardian of the public purse.

Document how the minister should deal with conflicting interests

The Minister of Finance responded to the Court of Audit’s findings by letter. In it, he took a step towards clarifying his role as shareholder of DNB and DNB’s implementation of its monetary tasks. In the Court of Audit’s opinion, the description would be more persuasive if the minister explained what information he needed in his capacity as shareholder and what information in his capacity as guardian of the public purse.

Why did we audit DNB’s mitigation of financial risks?

Between 2010 and 2012 the European Central Bank (ECB) purchased bonds issued by the governments in the eurozone that had the most pressing liquidity needs. From the end of 2011 it also provided credit to a number of banks in Greece, Cyprus and Portugal. At the end of 2014, when the financial crisis had passed its peak, the ECB decided to stimulate the eurozone economy by increasing the money supply. It did so on account of the exceptionally low rate of inflation in the eurozone. As a result of this monetary policy, the ECB’s debt portfolio has steadily increased since 2015 and the ECB is accordingly exposed to a financial risk. As the ECB and the national central banks of the euro countries together form the euro system, DNB is therefore exposed to the risks arising from the ECB’s purchasing programme. The Ministry of Finance is not involved in decision-making on the risks facing DNB as a result of the ECB’s monetary policy. How DNB mitigates these monetary policy risks has consequences for its balance sheet, financial stability and public finances. The Minister of Finance therefore has a part to play both as shareholder of DNB on behalf of the State and as the minister responsible for financial stability. The State, after all, is the guarantor should DNB’s balance sheet prove inadequate.

What methods did we use to audit DNB’s mitigation of financial risks?

The question at the heart of our audit was, how did the Minister of Finance fulfil his role as shareholder of DNB when deciding on the guarantee given in 2013 and the reserve formed in 2016. This primary question was worked out into three secondary questions:

• What is the Minister of Finance’s policy in his role as shareholder of DNB and how does he protect the various interests at play?
• What information is provided to the Minister of Finance to fulfil his role as shareholder of DNB?
• How does the minister evaluate this information in the light of conflicting interests?

To carry out our audit, we used information from the Ministry of Finance and information that the ministry received from DNB.