Here is the converted article in Markdown format:
Risk Weights and Capital Requirements: A Look into Faroese and Danish Banks
======================================================
A new report has shed light on the risk weights and capital requirements of Faroese and Danish banks, highlighting significant differences between the two groups. The study found that Faroese banks have a lower average risk weight compared to medium-sized Danish banks, while large Danish banks have a higher share of loans to corporates.
Risk Weights
The report notes that the risk weight for exposures secured by mortgages on real estate is relatively low, which contributes to the lower average risk weight of Faroese banks. In contrast, large Danish banks have a larger share of loans to corporates, with IRB risk weights significantly lower than those calculated using the SA method.
Comparison of Risk Weights
- Faroese banks have a lower average risk weight compared to medium-sized Danish banks.
- Large Danish banks have a higher share of loans to corporates with IRB risk weights significantly lower than those calculated using the SA method.
Impairment Charges and Losses
The study also examined impairment charges and losses in Faroese and Danish banks. While the Faroese banks have posted higher losses and impairment charges since 1996 compared to Danish SIFIs with IRB authorization, this could be due to their smaller size and less diversified portfolios.
Comparison of Losses
- Faroese banks have posted higher losses and impairment charges since 1996 compared to Danish SIFIs with IRB authorization.
Capital Requirements
The report highlights the importance of capital requirements in regulating bank lending. It notes that binding capital requirements can reduce lending and increase interest rates, as equity is considered an expensive source of funding. However, it also suggests that well-capitalized institutions are more resilient to losses and may actually benefit from higher capital requirements.
Capital Requirements
- Binding capital requirements can reduce lending and increase interest rates.
- Well-capitalized institutions are more resilient to losses and may benefit from higher capital requirements.
Faroese Banks’ Funding Sources
The report notes that Faroese banks’ primary funding sources are deposits and equity, with a share of 45% of bank deposits not covered by the deposit guarantee. This suggests that the banks have a stable source of funding and are less reliant on wholesale markets.
Funding Sources
- Primary funding sources: deposits and equity.
- Share of 45% of bank deposits not covered by the deposit guarantee.
Conclusion
The report concludes that all banks will be able to meet the phased-in buffer requirements and systemic risk buffer of 3% from January 2020. It also notes that SIFIs, such as large Danish banks, are subject to additional requirements to reduce the probability of failure and limit negative consequences in case of failure.
Key Findings
- Faroese banks have a lower average risk weight compared to medium-sized Danish banks.
- Large Danish banks have a higher share of loans to corporates with IRB risk weights significantly lower than those calculated using the SA method.
- Faroese banks have posted higher losses and impairment charges since 1996 compared to Danish SIFIs with IRB authorization.
- Well-capitalized institutions are more resilient to losses and may benefit from higher capital requirements.
- Faroese banks’ primary funding sources are deposits and equity, with a share of 45% of bank deposits not covered by the deposit guarantee.
Source
The report was compiled by [insert name of organization or researcher] and is based on data from Q2 2019.