Financial Crime World

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Capital Requirements and Lending

Capital requirements are minimum criteria for equity funding that may reduce lending and increase lending rates. However, empirical evidence suggests that well-capitalized institutions are met with lower interest rates on debt and a lower required rate of return on equity.

Key Points

  • Capital requirements introduce minimum criteria for equity funding
  • Empirical evidence shows that well-capitalized institutions have lower interest rates on debt and a lower required rate of return on equity

Impairment Charges and Losses in Faroese Banks

The Faroese banks have posted higher losses and impairment charges than Danish SIFIs (Systemically Important Financial Institutions) since 1996. This suggests that if given IRB (Internal Ratings-Based) permission, the Faroese banks’ risk weights would not be as low as those of the Danish SIFIs.

Key Findings

  • Faroese banks have posted higher losses and impairment charges than Danish SIFIs
  • Risk weights may be higher for Faroese banks if given IRB permission

Excess Capital Adequacy in Faroese Banks

The Faroese banks have an excess capital adequacy ratio, which is a buffer over and above the minimum capital requirements. There are no signs of a decline in lending in the Faroe Islands despite an increase in buffer requirements and economic growth.

Key Points

  • Faroese banks have an excess capital adequacy ratio
  • No decline in lending observed despite increased buffer requirements and economic growth

SIFI Requirements

SIFIs (Systemically Important Financial Institutions) are subject to additional requirements to reduce the probability of failure and limit negative consequences in case of failure. Once designated as a SIFI, institutions must comply with a SIFI capital buffer requirement and other specific rules.

Key Points

  • SIFIs are subject to additional requirements to reduce the probability of failure
  • Institutions designated as SIFIs must comply with a SIFI capital buffer requirement and other specific rules