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Faroese Banks’ Risk Weights Higher than Those of Danish SIFIs
Copenhagen - A new report has revealed that the risk weights of Faroese banks are higher than those of Danish Systematically Important Financial Institutions (SIFIs).
Comparison of Risk Weights
According to the report, the average risk weight of Faroese banks is 17.5%, compared to 15.2% for Danish SIFIs. The main reason for this difference is that Faroese banks have a larger share of corporate loans in their portfolios, which are subject to higher risk weights.
Historical Losses and Impairment Charges
The report also found that Faroese banks have posted higher losses and impairment charges than Danish SIFIs since 1996. This suggests that the risk weights of Faroese banks may be too low if they were given IRB (Internal Ratings-Based) permission.
Capital Requirements and Lending
Importance of Capital Requirements
The report highlights the importance of capital requirements in reducing lending and increasing lending rates. However, it also notes that an increase in equity can make a bank more resilient to losses on its assets, which can reduce the risk for both creditors and shareholders.
Adjustment to Higher Capital Requirements
The report suggests that banks may adjust to higher capital requirements by:
- Increasing their capital
- Reducing their risk-weighted assets
- Reducing their excess capital adequacy
Faroese Banks’ Excess Capital Adequacy
Meeting Buffer Requirements
Despite an increase in buffer requirements, there have been no signs of a decline in lending in the Faroe Islands. The report notes that all banks will be able to meet the phased-in buffer requirements and systemic risk buffer of 3% from January 2020.
Importance of Excess Capital Adequacy
The report also highlights the importance of excess capital adequacy in Faroese banks, which are primarily funded by deposits and equity.
SIFI Requirements
Compliance with Additional Requirements
The report emphasizes the need for SIFIs to comply with additional requirements to reduce the probability of failure and limit negative consequences. SIFIs must comply with a SIFI capital buffer requirement and other regulatory requirements.
Conclusion
Overall, the report suggests that Faroese banks face higher risk weights than Danish SIFIs due to their larger share of corporate loans and higher losses and impairment charges. However, it also notes that an increase in equity can make a bank more resilient to losses on its assets, which can reduce the risk for both creditors and shareholders.