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Denmark’s Banking Sector Still Dominates Economy Despite Reduced Influence
Copenhagen, Denmark - December 2020
The institutional-specific countercyclical buffer rates in Denmark and Iceland have been found to be influenced by institutions’ exposures in different countries. The three Icelandic SIFIs are subject to the same buffer requirements, according to data from European Systemic Risk Board and national authorities.
Banking Sector Approaches
In a report released today, it was revealed that the Faroese and Icelandic banks use the standardized approach (SA) to calculate their risk weights, just like Denmark’s Spar Nord Bank. The other Danish SIFIs, however, employ Internal Ratings-Based (IRB) models to determine their risk weights.
Buffer Requirements
The buffer requirements are calculated as a percentage of institutions’ risk-weighted exposures. According to the report, the thresholds were set at a time when Denmark’s banking sector accounted for approximately 400% of the country’s GDP, while the Faroese banking sector represented 200% of the Faroese GDP.
Sector Growth
In 2018, the Danish banking sector (measured on balance sheet) accounted for 358% of Denmark’s GDP, and the Faroese banking sector accounted for 154%.
Risk Weights
The report also highlighted that institutions using the SA approach divide their exposures into categories with internationally determined risk weights. However, this method is only adapted to general risk associated with exposure types and not actual risk of each exposure.
- Institutions employing IRB methods must calculate risk weights by estimating key parameters for each exposure based on their own data.
- The calculated risk weights reflect aspects such as institution’s loss history and customers’ individual circumstances, among others.
Average Risk Weights
The report noted that the average risk weight of Faroese banks is higher than that of large Danish banks in group 1 but slightly lower than medium-sized banks in group 2. Icelandic banks have a higher average risk weight than both Faroese and Danish banks.
Iceland’s Banking Sector Sees Higher Average Risk Weight
Reykjavik, Iceland - February 2020
A report released today by the European Systemic Risk Board and national authorities revealed that Iceland’s banking sector has a higher average risk weight compared to Denmark’s. The three Icelandic SIFIs are subject to the same buffer requirements.
Banking Sector Approaches
The report found that Faroese banks use the standardized approach (SA) to calculate their risk weights, while Danish banks employ Internal Ratings-Based (IRB) models. The SA method is simpler and more transparent but only adapted to general risk associated with exposure types and not actual risk of each exposure.
Risk Weights
Institutions using IRB methods must estimate key parameters for each exposure based on their own data. The calculated risk weights reflect aspects such as institution’s loss history and customers’ individual circumstances, among others.
Average Risk Weights
The report noted that the average risk weight of Icelandic banks is 72.7%, while Faroese banks have an average risk weight of 61.2%. Danish SIFIs using IRB methods have lower risk weights, especially for Spar Nord Bank.
Conclusion
Overall, the reports highlight the importance of careful risk management in both Denmark and Iceland to ensure financial stability in the region.