Financial Institution Risk Management Strategies in the Faroe Islands Under Scrutiny

A Recommendation to Revise Criteria for Designating Systemically Important Financial Institutions (SIFIs)

The Systemic Risk Council has made a recommendation to change the criteria for designating a credit institution as a systemically important financial institution (SIFI) in the Faroe Islands. The council suggests introducing a lower limit for when a bank is considered too small to be designated as an SIFI, thereby exempting smaller institutions from additional regulatory requirements.

Current Designation Criteria and Concerns

The current designation criteria are based on indicators measuring the size of a bank relative to the Faroese economy and banking sector. However, given the small size of the Faroese economy, even small banks can achieve SIFI status, which may not be justified.

• Small banks in the Faroe Islands may not have the same level of systemic risk as larger institutions.
• The current criteria may lead to unnecessary regulatory requirements for smaller banks.

Revised Criteria and Implications

To address this issue, the council recommends setting a lower limit for a bank’s balance sheet at 3 billion krónur. This amount would be adjusted over time to account for positive growth in the banking sector.

• Under the revised criteria, two of the four banks in the Faroe Islands would be designated as SIFIs, down from three currently.
• The third-largest bank, Norðoya Sparikassi, would no longer be considered a SIFI and would therefore not be subject to additional regulatory requirements.

Goals and Benefits

The council’s recommendation is in line with current legislation and aims to reduce the risk of systemic financial instability in the Faroe Islands by identifying institutions that are most critical to the economy. The government has taken note of the recommendation and will decide on it within three months.

• Experts believe that this change would help to reduce the probability of a major bank failing, which could have significant negative consequences for the Faroese economy.
• The revised criteria would provide more flexibility in managing financial risk in the region.

Conclusion

The Systemic Risk Council’s recommendation aims to improve the effectiveness and efficiency of financial institution risk management strategies in the Faroe Islands. By revising the criteria for designating SIFIs, the council hopes to reduce systemic risk and promote a more stable financial environment in the region.