Financial Crime World

Faroese Banks Face Financial Risks as House Prices Rise

A warning has been issued by the Systemic Risk Council regarding financial risks building up in the Faroe Islands. The council’s report highlights concerns over the rising house prices and the potential impact on the country’s economy.

Rising House Prices and Tightened Credit Conditions

According to the report, the banks’ interest spread has increased, indicating a tightening of credit conditions. This suggests that the lending rate for new household loans is higher than Danmarks Nationalbank’s lending rate. Additionally, the leverage of the four Faroese banks has also risen, suggesting that they may be vulnerable to shocks in the market.

Lending Patterns and Vulnerability

The council is particularly concerned about the rapid rise in house prices, which have increased by over 20% in the past year. This has led to a surge in lending to households and non-financial corporations, with total lending now standing at over 100% of GDP. Furthermore, there has been a shift in lending patterns, with households and non-financial corporations now accounting for over 50% of total lending.

Risks and Consequences

This may increase the vulnerability of the financial system to shocks. The rapid rise in house prices may lead to a housing bubble, which could burst and have severe consequences for the economy.

Government Response

In response to the warning, the Danish government has announced that it will continue to monitor the situation closely and take any necessary steps to address the risks.

Definition of Key Terms

  • The banks’ interest spread is defined as the difference between the lending rate on new lending to households and Danmarks Nationalbank’s lending rate.
  • Leverage is defined as the sum of assets, guarantees, and credit commitments divided by Tier 1 capital (including Additional Tier 1 capital).
  • Lending relative to GDP is shown in Chart 2 (left) for three different loan series, including total lending to households and non-financial corporations in the Faroe Islands by Faroese, Greenlandic, and Danish banks and by Danish mortgage banks.
  • House prices relative to disposable income are shown in Chart 3 (right) based on house prices in Tórshavn only.

Appendix

For a more detailed breakdown of the data used in this report, please see the appendix.