Banking Sector in Denmark and Faroe Islands Faces Increased Regulatory Requirements

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Systemically Important Financial Institutions Must Meet Higher Capital Buffer Requirements

The Danish and Faroese banking sectors are facing increased regulatory requirements aimed at ensuring the stability of the financial system. According to a report by the Danish Financial Supervisory Authority (DFSA), Systemically Important Financial Institutions (SIFIs) in both countries must meet higher capital buffer requirements to mitigate potential risks.

Higher Capital Buffer Requirements for SIFIs

The DFSA has announced that SIFIs, which include some of Denmark’s largest banks, will need to maintain a higher minimum common equity tier 1 (CET1) ratio of 13.5% by the end of 2023. This is up from the current requirement of 12%. The move comes as part of efforts to strengthen the resilience of the financial system and reduce the risk of future crises.

Increased CET1 Ratio for SIFIs in the Faroe Islands

In the Faroe Islands, which are a self-governing region of Denmark, SIFIs will also need to increase their CET1 ratio to 13.5% by the end of 2023. The move is seen as a response to concerns over the potential impact of the financial crisis on the islands’ fragile economy.

Risk Weights for Faroese and Danish Banks

According to the report, the average risk weight of Faroese banks is higher than that of large Danish banks, but slightly lower than that of medium-sized banks. Icelandic banks have a higher average risk weight than both Faroese and Danish banks.

Differences in Risk Weights between Individual Institutions

The report also highlights differences in risk weights between individual institutions, with some SIFIs using the International Risk-Based Approach (IRB) to calculate their credit risk exposure. The IRB method allows for more nuanced calculations of risk, but requires authorization by the DFSA.

Changes Ahead: Output Floors and Revised IRB Methods

In addition to the increased capital buffer requirements, the report notes that a process is underway in the EU to implement the Basel Committee’s proposal on output floors and revised IRB methods. This could lead to further changes in the way SIFIs calculate their credit risk exposure.

Positive Step for Regulators, Concerns for SMEs

The move is seen as a positive step by regulators, who aim to ensure the stability of the financial system and protect consumers from potential losses. However, some industry experts have expressed concerns over the potential impact on small and medium-sized enterprises (SMEs), which may struggle to meet the increased capital requirements.

Conclusion

In conclusion, the banking sector in Denmark and the Faroe Islands is facing increased regulatory requirements aimed at ensuring the stability of the financial system. SIFIs must increase their capital buffer requirements to mitigate potential risks, while individual institutions may need to adapt their risk assessment methods to comply with new regulations.