It is the task of the Systemic Risk Council, the Council, to identify and monitor systemic financial risks in the Faroe Islands, and the Council may make recommendations on macroprudential measures concerning banks in the Faroe Islands. The purpose of the general systemic risk buffer is to make the banks more resilient to strong fluctuations in the Faroese economy.
The Minister for Industry, Business and Financial Affairs is responsible for setting the systemic buffer rate for the Faroe Islands. In accordance with the Council's recommendation of March 2017, the Minister has set a general systemic risk buffer rate of 1 per cent for exposures in the Faroe Islands from 1 January 2018. The present recommendation follows up the March 2017 recommendation in which the Council assessed that the buffer rate should be raised further over the coming years. The Faroese Systemic Risk Council has been involved in the Council's discussion of the buffer rate.
With a view to ensuring a level playing field for Faroese and foreign banks with exposures in the Faroe Islands, the Council still advises the Minister to request the authorities in other relevant countries to acknowledge the systemic risk buffer rate for Faroese risk exposures.
The Minister for Industry, Business and Financial Affairs is required, within a period of three months, to either comply with the recommendation or to present a statement explaining why the recommendation has not been complied with.
The Faroese economy is a small, open economy with a concentrated business structure heavily dependent on fisheries and aquaculture. This makes the economy vulnerable to negative economic shocks, which may, via direct and indirect effects, entail losses in the banking sector and amplify real economic fluctuations. Historically, the Faroese economy has fluctuated strongly, with marked variation in the loan impairment charges of the Faroese banks. The Council still finds that the Faroese financial sector is vulnerable to the structural factors characterising the Faroese economy, cf. Appendix A.
The Council finds that the systemic risk buffer for the Faroe Islands can address these vulnerabilities. The aim of the systemic risk buffer is to prevent and mitigate structural vulnerabilities. The buffer increases the banks' capitalisation, thereby enhancing their resilience to negative economic shocks. This contributes to ensuring financial stability in the Faroe Islands.
Given their current capitalisation and the phasing-in of other capital buffer requirements, most Faroese banks will be able to meet the requirement for a general systemic risk buffer rate of 3 per cent, cf. Appendix B. Moreover, it is easier for the banks to increase their capitalisation in periods of economic recovery and positive earnings, as in the current situation. The smallest Faroese bank will have to increase its capital ratio.
The requirement that the banks must maintain a systemic risk buffer is not a "hard" requirement. So banks in breach of the requirement will not lose their banking licences. Instead, they will be required to submit a capital conservation plan to the Danish Financial Supervisory Authority, and bonus and dividend payments etc. may also be limited if the banks fail to comply with the combined capital buffer requirement. As regards systemically important financial institutions, SIFIs, the general systemic risk buffer rate will be an add-on to the SIFI requirements, which are to be phased in by 2019.
The systemic risk buffer was introduced in financial regulation after the financial crisis as part of a larger set of reforms aiming to make the financial sector more robust. The systemic risk buffer is also used in other countries, cf. Appendix C.
Lars Rohde, Chairman of the Systemic Risk Council
Statements from the representatives of the ministries on the Council
"Legislation regarding the Systemic Risk Council stipulates that recommendations addressed to the government must include a statement from the government representatives on the Council. Neither the government representatives nor the Danish Financial Supervisory Authority have the right to vote on recommendations addressed to the government.
The government will await the decision of the Faroese government with a view to assessing whether the proper conditions exist for complying with the recommendation. Against that background, the government will decide on the recommendation from the Systemic Risk Council within a period of three months."
 A Systemic Risk Council was established in the Faroe Islands in early 2018. It can issue observations, warnings and recommendations concerning Faroese areas of responsibility. As regards Danish areas of responsibility in the financial area, the Faroese Systemic Risk Council may issue opinions to the Systemic Risk Council in Denmark.
 The recommendation is available here.
 See Appendix C for more details. For appendix, see PDF.
 In addition to the systemic risk buffer, the combined capital buffer requirement comprises the capital conservation buffer and the countercyclical capital buffer, cf. Executive Order no. 1349 of 12 December 2014 on calculation of the combined buffer requirement, the maximum distributable amount and the content of a capital conservation plan for certain financial enterprises and the Danish Financial Supervisory Authority's memo, "Bestemmelser om kapitalbevaringsplan og opgørelse af det maksimale udlodningsbeløb" (Provisions on a capital conservation plan and calculation of the maximum distributable amount) at the Danish Financial Supervisory Authority's website.