The establishment of the economic and monetary union on 1 January 1999 has consequences for the danish banks whether Denmark will be participating in the EMU cooperation at a later date or not at all. The EMU preparations of the Danish Bankers Association is based on the assumption that Denmark will participate in EMU but at a later date than the official starting date of Stage 3 of EMU on 1 January 1999. The main reason for this assumption is that a considerable demand for financial services in euro is expected to arise in the Danish society even if we do not participate. Therefore, to avoid successive cost-intensive adaptations, the most appropriate thing to do is to include the possibility of Denmark's eventual participation in the preparations for such demand.
The purpose of this article is to describe the preparatory
work of the Danish banking sector. The article first considers the preparations
for a domestic payment system in euro, which is expected to come into operation
on 15 May 1999. It then turns to the changes in the money market. This
is followed by a description of the changes of the Danish capital market
in connection with the introduction of the euro. Finally, the article considers
the questions and matters that the individual Danish bank must have clarified
before the introduction of the euro.
THE ESTABLISHMENT OF A DOMESTIC EURO CLEARING SYSTEM
Danish Bankers Association is of the opinion that particularly trade and industry's demand for domestic euro payments may assume such proportions in an out situation that to maintain the competitiveness of Danish banks it is necessary to make preparations to ensure that it will be possible to offer such services. Therefore, it is found necessary to adapt the domestic payment system infrastructure so that it will be possible to offer domestic euro payments in an out situation. The adaptation should also include preparations for the possibility of a subsequent transitional and euro area situation.
Parallel with the existing system for retail payments in kroner a retail clearing and settlement system for retail payments will be established for euro payments. This will come into operation on 15 May 1999. From that date banks must be able to book a payment transaction in euro. This can be done on a euro account or by converting the amount into Danish kroner if the recipient account is a krone account. In the case of conversion into Danish kroner it is up to the bank to decide whether the amount is to be dealt with in the same way as other foreign currencies. Thus the decision does not imply a requirement that the bank shall make euro accounts available to customers. Whether the bank wants to offer payment transactions in euro to its customers is up to the bank to decide.
A settlement system for retail payments in euro will be established parallel with the existing settlement system for retail payments in kroner. Banks choosing to be independent participants in both systems undertake to be able to provide the necessary liquidity cover at the central bank in both kroner and euro.
Credit transactions in the paperless clearing is to be
offered to the customers in euro from 15 May 1999. It has not yet been
decided whether or when cheques and payment cards are to be offered in
THE MONEY MARKET
Those Danish banks which are not established in the euro area, will have limited access to liquidity in euro. No access to interday liquidity, i.e. overnight liquidity from the European Central Bank, will be allowed for Danish banks which are not established in the euro area or which cannot/will not participate in the monetary policy operations in the EMU country in which they might be established. For these banks the access to overnight euro liquidity will be limited to the interbank market, which has the potential of becoming quite significant from 1 January 1999. It should be noted that to the extent a Danish bank might have access to ECB liquidity in euro the bank must be able to furnish collateral in eligible securities.
The non-euro area EU central banks will be able to offer
intraday liquidity in euro to their credit instituions on the basis of
a deposit in euro with the ESCB. Any intra-day liquidity provided for the
Danish central bank will be made available to DEBES (the Danish part of
TARGET) participants against provision of sufficient collateral.
THE CAPITAL MARKET
The establishment of EMU has consequences for the Danish capital market whether Denmark will be participating or not. In cooperation with the Copenhagen Stock Exchange, the Association of Stockbrokers, the Association of Mortgage Credit Banks and the Danish Securities Centre, the Danish Bankers Association has discussed matters relating to the Danish capital market, assuming that Denmark will participate in the EMU cooperation but from a later date than 1 January 1999.
Relating to trading and pricing on the Copenhagen Stock Exchange the financial sector recommends for Denmark as a non-euro area country that no parallel quotations be made in euro and Danish kroner in the same securities code and that Danish krone-denominated bonds continue to be traded. Thus it is not expected to be necessary to make signifiant changes in the systems of Copenhagen Stock Exchange. However, a need might arise to be able to trade, clear and settle highly liquid, internationally traded shares in euro.
After discussions of share issues in Denmark after 1 January 1999 the financial sector recommends a changeover of the Danish share market to a non-par-value (NPV) model independently of Danish participation in EMU. This wil cause the nominal value to disappear and make the redomination considerations superfluous.
As regards bond issues the financial sector recommends
that the Danish day-count conventions is changed to an international standard;
however, settlement of interest payments by the same proportion per settling
period should be maintained. Further, it is recommended to consider a change
of the special Danish conventions concerning ex-coupon periods and the
drawing of bonds. Basically, a change of all conventions taken together
is preferred in the light of the international harmonisation initiative
taken in connection with the transition to Stage 3 of EMU.
THE INDIVIDUAL BANK'S PREPARATION
It is evident that there are a number of questions and matters that the individual bank must have clarified before the introduction of the euro on 1 January 1999. In fact the main part of the preparatory work rest with the individual bank.
The individual bank shall among other things :
- prepare for the handling of a new foreign exchange code EUR and the locking of the currencies of the participating countries
- prepare for the conversion between the currencies of the participating countries at the fixed exchange rates
- inform the customers about the introduction of the euro
Relating to the strategy in connection with payment transfers the bank shall :
- decide whether it will be participating in the Danish part of TARGET (DEBES).
- decide whether it will keep euro accounts for customers and whether it will offer domestic euro payments to customers
- decide whether it will be a direct or indirect participant in a settlement system for euro retail payments
- prepare for any necessary provision of liquidity in euro, e.g. through participation in monetary policy operations via establishment in a participating country. This covers the need for a securities holding which is eligible as collateral.
Relating to the strategy in the capital market the bank shall :
- prepare for transition to internationally accepted market conventions
- prepare for increased demand for trading, settlement and issues in euro
- decide whether it will offer customers settlement facilities in euro in connection with the settlement of securities trades at the Danish Securities Centre
- prepare for new demands from the international clearing centres, Euroclear and CEDEL, in connection with the introduction of the euro
- make preparations to enable the redomination of securities issued by the participating countries
- prepare for the receipt of new SWIFT messages in connection
with securities trading
Should the Danes choose to participate at a later date, a referendum will be required, and it cannot be expected to be called until opinion polls show a clear preference for participation. It is difficult to prophesy whether and when this preference will arise. The Danish authorities are bound by the Danish 'no' and can not make preparations for a possible changeover.
As regards the preparations of the Danish Bankers Association,
particularly within domestic payment transfers and the capital market,
the likely changeover scenarios for Danish participation have been included.
In addition, the possibility that the euro will become widely used in the
Danish society even though we are not participating has been considered.
During these preparations no attempt has been made to give precise estimates
of such a currency substitution or of how the changeover will progress.
Basically, however, it is believed that with respect to trade and industry
and professional participants in the capital market the currency substitution
may assume large proportions and that from the time when Denmark might
choose to participate in EMU, the changeover period may both formally and
in practice turn out to be much shorter than the changeover period of the
countries which participate from the beginning.