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Faroese Banks’ Capital Buffers Meet Requirements Despite Economic Uncertainty

Copenhagen - Danish Financial Supervisory Authority (DFSA) Report Reveals Resilience of Faroese Banking System

According to a recent report by the Danish Financial Supervisory Authority (DFSA), the Faroese banking system has demonstrated resilience in the face of economic uncertainty. The report highlights that all four Faroese banks have met the phased-in buffer requirements and systemic risk buffer of 3 per cent from January 2020.

Importance of Capital Buffers

“A well-capitalised bank is better equipped to absorb losses on its assets, reducing the risk of creditors suffering losses,” said a DFSA spokesperson. The report emphasizes the significance of capital buffers in ensuring the stability of the financial system.

Funding Sources and Lending Practices

Unlike other institutions, Faroese banks have not reduced lending despite an increase in buffer requirements. This is attributed to their primary funding sources being deposits and equity, with a significant portion of deposits not covered by the deposit guarantee scheme. In contrast, large Danish banks have a larger share of loans to corporates than the Faroese banks, which could impact risk weights.

Risk Weights for Corporate Exposures

The report notes that IRB risk weights for corporate exposures are significantly lower than SA risk weights due to the institutions’ individual circumstances and loss history. However, if given IRB permission, Faroese banks’ risk weights would not be as low as those of Danish SIFIs.

Impairment Charges and Losses

Faroese banks have posted higher losses on corporate loans compared to Danish SIFIs, suggesting that their risk weights would not be as low as those of Danish SIFIs. This is a key consideration for regulators when determining capital requirements.

Impact of Capital Requirements on Lending

While some argue that binding capital requirements reduce lending and increase interest rates, empirical evidence supports the notion that well-capitalised institutions are met with a lower required rate of return from creditors.

Conclusion

In conclusion, the report emphasizes the importance of capital buffers in maintaining financial stability and highlights the resilience of Faroese banks in meeting buffer requirements despite economic uncertainty. The findings demonstrate the ability of Faroese banks to absorb losses and maintain lending practices while still meeting regulatory requirements.