Increased Credit Risks for Danish Financial Institutions Amid U.S. Developments

Key Takeaways

• Rising Credit Risk: U.S. political developments, including tariffs and the weakened dollar, are heightening credit risk for Danish credit institutions, particularly in export-dependent and consumer-oriented sectors.
• Strengthened Risk Management: Institutions are strengthening their credit risk management by engaging in proactive customer dialogues and updating risk models to reflect heightened uncertainty.
• Increased Impairment Charges: Credit institutions are adjusting impairment calculations in response to an increasingly negative economic outlook, which is leading to higher impairment charges for at-risk customers.
• Proactive Adjustments: Institutions are using management estimates to supplement traditional impairment models in cases where risks are not fully captured, especially in the context of shifting geopolitical and economic conditions.

Deep Dive

As political measures in the U.S. continue to evolve, with tariffs and a weakening dollar dominating the news cycle, Danish credit institutions are facing heightened credit risks. This trend was discussed extensively by the Danish Financial Supervisory Authority (DFSA) in a series of consultations with the largest credit institutions in Denmark in April 2025. These developments have led to increased uncertainty, especially in sectors dependent on export markets, and have prompted a reassessment of impairment needs across various portfolios.

The core takeaway from the DFSA's findings is that the potential for credit risk is escalating due to direct and indirect effects of U.S. policies. These include the tariffs’ impact on net earnings for businesses and broader concerns over the weakening of the dollar. As consumer confidence wanes and global supply chains remain fragile, these factors contribute to greater volatility, exacerbating the challenges for credit institutions that are already managing portfolio risks and exposures.

The immediate effects of U.S. tariffs have already placed some Danish companies under financial pressure, particularly those reliant on exports or operating in cyclical, consumer-driven industries. While some customers have temporarily benefitted from inventory build-ups in the U.S., the longer-term outlook for many institutions remains uncertain. Additionally, rising inflation, fluctuating interest rates, and challenges in employment and economic growth all contribute to a more precarious macroeconomic landscape.

The Danish institutions are closely monitoring these developments, especially for their export-heavy clients and those who may be vulnerable to the global ripple effects of these shifts. For the time being, the credit risks remain somewhat manageable, as many institutions report that their corporate customers are financially resilient and adaptable. However, private customers remain unaffected for now, with the greatest concern for those in sectors most impacted by global changes.

Strengthening Risk Management Protocols

Given the evolving nature of the situation, Danish financial institutions are strengthening their customer dialogue and risk management practices. Drawing from lessons learned during previous crises such as the COVID-19 pandemic and the Russian invasion of Ukraine, institutions have adopted a more proactive approach to customer engagement. Through targeted outreach, especially with key corporate clients, these institutions are gathering critical information on customers’ vulnerabilities to external economic shocks.

Using advanced risk modeling techniques, including scenario-based analysis, financial institutions have adjusted their impairment models to account for the growing uncertainty. These analyses focus on three potential economic outcomes: positive, neutral, and negative scenarios, with the latter now being given greater weight. The increased probability of a negative economic outlook has contributed directly to higher impairment charges across several portfolios.

The impact of U.S. policy changes has been particularly pronounced in the impairment calculations at the end of Q1 2025. For many institutions, their usual impairment models, which rely on three distinct economic scenarios, now require additional adjustments to accurately reflect the severity of the downside risks. As a result, credit exposures previously assessed as low risk (Stage 1) have now moved into higher-risk categories (Stage 2). This transition is resulting in higher impairment charges and prompting a reevaluation of the creditworthiness of clients who may be adversely impacted by U.S. developments.

For institutions whose existing models are not able to fully capture the evolving risks, management estimates are being employed. These estimates help ensure that the level of impairments appropriately reflects future uncertainties that the models may not fully account for. These estimates also consider factors such as customer behavior, the potential for hedging against interest rate, currency, and commodity risks, and the future impact of volatile geopolitical developments.

Proactive Dialogue and Future Outlook

As the global risk landscape remains in flux, Danish credit institutions are relying heavily on personalized customer interactions to assess individual risks. These discussions, which are supplemented by data on customers’ operations and financial exposures, provide a clearer picture of how specific companies and industries might weather the storm.

With a cautious outlook, many financial institutions are preparing for further deterioration in economic conditions and are revising their impairment charges accordingly. Given the ongoing uncertainty, these institutions have also highlighted the importance of maintaining data quality, ensuring that any deficits in available information do not result in underestimating impairments.

While the ultimate impact of the U.S. political developments on Danish credit institutions remains to be seen, the ongoing monitoring of credit risks and adjustment of impairment models will be key to mitigating potential financial strain in the coming months.

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