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Banking Regulations in the Faroe Islands

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Risk Weights and Impairment Charges

The IRB risk weights for corporate exposures are significantly lower than the SA risk weights. This has led to higher losses and impairment charges for Faroese banks compared to Danish SIFIs with IRB authorization, especially on corporate loans.

Key Points:

• IRB risk weights are lower than SA risk weights
• Faroese banks have experienced higher losses and impairment charges

Capital Requirements and Lending

Higher capital requirements can reduce lending, but empirical evidence suggests that well-capitalized institutions meet markets with a lower required rate of return. Banks can adjust to higher capital requirements by increasing equity, reducing risk-weighted assets, or reducing excess capital adequacy.

Key Points:

• Higher capital requirements can reduce lending
• Well-capitalized institutions may meet markets with a lower required rate of return
• Banks can adjust to higher capital requirements through various methods

Excess Capital Adequacy in Faroese Banks

Despite an increase in buffer requirements, there have been no signs of a decline in lending in the Faroe Islands, coinciding with an economic upswing. All banks will meet phased-in buffer requirements and systemic risk buffers from January 2020.

Key Points:

• Buffer requirements increased for Faroese banks
• No decline in lending observed despite increased buffer requirements
• Banks will meet phased-in buffer requirements by January 2020

SIFI Requirements

SIFIs are subject to additional capital buffer requirements to reduce failure probability and mitigate negative consequences in case of failure.

Key Points:

• SIFIs have additional capital buffer requirements
• Requirements aim to reduce failure probability and mitigate negative consequences