Here is the converted article text in markdown format:

Capital Requirements and Risk Weights for Corporate Exposures in Denmark and the Faroe Islands

Introduction

The banking system in Denmark and the Faroe Islands has undergone significant changes regarding capital requirements and risk weights for corporate exposures. This article provides a summary of the main points and key findings.

IRB Approach and Risk Weights

• The Internal Ratings-Based (IRB) approach allows institutions with IRB authorization to use their own estimates of credit risk to determine risk weights.
• This can lead to lower risk weights compared to the Standardized Approach (SA) method.

Comparison of Danish SIFIs and Faroese Banks

• Since 1996, Faroese banks have posted higher losses and impairment charges than Danish Systemically Important Financial Institutions (SIFIs).
• This suggests that if given IRB permission, their risk weights would not be as low as those of Danish SIFIs.

Capital Requirements and Equity Funding

• Capital requirements introduce minimum criteria for the share of equity funding in a bank’s capital structure.
• Higher equity makes a bank more resilient to losses and reduces creditor risk, but also reduces interest rates on debt and required returns on equity.

Adjusting to Higher Capital Requirements

• Banks can adjust to higher capital requirements by:
  • Increasing their equity
  • Reducing risk-weighted assets (e.g., by reducing lending or changing asset mix)
  • Reducing excess capital adequacy (voluntary buffer)

Lending and Economic Upswing in the Faroe Islands

• The Faroese banks have maintained a stable level of lending despite increased buffer requirements and an economic upswing in the Faroe Islands.

Meeting Phased-in Buffer Requirements

• All four Faroese banks are expected to meet the phased-in buffer requirements and systemic risk buffer from 2020.