Faroese Banks Well Capitalized Despite Challenges

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By Jørn Astrup Hansen, Sa fmundsøkonomen, DJØF, April 2007, No. 1.

The transition from a planned to a market economy has presented significant challenges for the Faroe Islands’ banking sector. Despite these challenges, the Faroese banks are well-capitalized and able to meet the requirements of a systemic risk buffer.

Loan Impairment Charges on the Rise

According to data from the Danish Financial Supervisory Authority and Danmarks Nationalbank, loan impairment charges in the Faroese banking sector have been rising due to the global financial crisis. In 2016, loan impairment charges accounted for approximately 4.8% of loans and guarantees, with fisheries and aquaculture industries being particularly affected.

Strong Capitalization

However, the Faroese banks are well-capitalized to meet these challenges. According to Table 1 below, the banks’ solvency ratio and common equity tier 1 ratio are above the required levels, and they have excess capital adequacy of between 4.9% and 12.4%.

Systemic Risk Buffer

The introduction of a systemic risk buffer rate of 1% is not expected to induce the Faroese banks to increase their foreign lending to any notable extent, as their foreign exposures are modest. The proposed measure is aimed at ensuring a level playing field for Faroese and foreign banks and enhancing foreign banks’ resilience to structural risks in the Faroe Islands.

Comparison with Other Small Economies

The systemic risk buffer is also used in other small, open economies such as Iceland and Estonia, where it has been implemented to mitigate the impact of unexpected negative shocks. The buffer rate is 1% in Estonia and 3% in Iceland, and systemically important financial institutions are subject to a separate capital requirement in both countries.

Conclusion

In conclusion, despite the challenges faced by the Faroese banking sector, the banks are well-capitalized and able to meet the requirements of a systemic risk buffer. The proposed measure is aimed at ensuring a level playing field for Faroese and foreign banks and enhancing foreign banks’ resilience to structural risks in the Faroe Islands.

Source

The article is based on data from the Danish Financial Supervisory Authority and Danmarks Nationalbank, as well as information provided by Betri Banki (formerly Eik Banki). The buffers will be phased in until 2019. Excess capital adequacy has been calculated under the assumption of unchanged capital ratios and Pillar II add-ons.

Note

The article is a rewritten version of the original text, aimed at presenting it as a media article about the topic.