Faroese Banks Hold Their Own Against Capital Requirements

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Despite an increase in buffer requirements, the four major banks in the Faroe Islands - BankNordik, Betri Banki, Norðoya Sparikassi, and Suðuroyar Sparikassi - have not seen a decline in lending. In fact, the islands’ economy has been experiencing an upswing.

Capital Adequacy

According to recent financial statements, the banks have reported healthy levels of capital adequacy. The Danish Financial Supervisory Authority (FSA) reports that the banks’ primary funding sources are deposits and equity.

Funding Sources

• Deposits
• Equity

The FSA’s report highlights the banks’ ability to adjust to higher capital requirements by increasing their capital through retained earnings, reducing risk-weighted assets, or reducing excess capital adequacy.

Resilience in the Face of Increased Buffer Requirements

“The Faroese banks have shown resilience in the face of increased buffer requirements,” said a spokesperson for the FSA. “Their ability to adapt and adjust to changing regulatory demands is a testament to their strong financial foundations.”

Risk Weights

• The report notes that the Faroese banks’ risk weights are generally lower than those of Danish SIFIs (Systemically Important Financial Institutions), which are subject to additional capital requirements due to their potential systemic impact.

Equity Funding

The FSA’s report highlights the importance of equity in funding a bank’s lending activities. While it is often assumed that equity is an expensive source of funding compared to debt, the report suggests that an increase in equity can actually make a bank more resilient to losses on assets, ultimately reducing the risk for creditors.

Phased-In Buffer Requirements

• The Faroese banks are expected to meet the phased-in buffer requirements and systemic risk buffer of 3% from January 2020.

Conclusion

With their strong capital adequacy ratios and ability to adapt to changing regulatory demands, it is likely that the Faroese banks will continue to play a vital role in the islands’ economy for years to come.

Capital Requirements and Excess Capital Adequacy (Q2 2019)

Source: Danish Financial Supervisory Authority (FSA)