The Systemic Risk Council recommends to the Minister for Industry, Business and Financial Affairs to activate a countercyclical capital buffer at a rate of 0.5 per cent in Greenland from 1 January 2026, increasing to 1.0 per cent from 1 July 2026, pursuant to section 343s(3)(4) of the Financial Business Act.
The Minister for Industry, Business and Financial Affairs is responsible for setting capital buffer requirements in Greenland, including the countercyclical capital buffer rate. The Minister is obliged to either follow the recommendation or present a statement explaining and justifying why the recommendation has not been followed within a period of three months.
The Systemic Risk Council is tasked with identifying and monitoring systemic financial risks in Greenland and can recommend macroprudential measures that can reduce or prevent the build-up of systemic financial risks. The purpose of introducing a countercyclical capital buffer is to minimise the real economic downturn that would otherwise follow if access to credit for households and businesses is unduly tightened during periods of stress in the financial system.
The Council sets the countercyclical capital buffer rate based on an overall assessment of developments in the financial system and the economy.[1] In addition to indicators on developments in the financial system and the economy, the Council also considers other relevant information, such as other policy measures and current and future requirements for institutions.
With their current capital level, institutions with credit exposures in Greenland can already fulfil a requirement for a total countercyclical capital buffer rate of 1 per cent. Overall, activation of the countercyclical capital buffer is therefore not expected to affect the ability of creditworthy customers to obtain financing.
The Council is ready to recommend a reduction of the buffer rate with immediate effect if there is a risk of a severe tightening of credit to households and businesses. Foreign institutions with credit exposures in Greenland will be subject to a countercyclical buffer in Greenland as long as this does not exceed 2.5 per cent.[2]
The Council assesses the countercyclical capital buffer level in Greenland on a regular basis.
Explanatory statement
There are signs of cyclical systemic risks building up in Greenland.
Greenland is in a long economic upswing with a tight labour market (see Appendix, chart 1, left).[3] Although rising interest rates have dampened domestic demand, the impact has been limited so far. The widespread use of fixed-rate mortgages means that higher interest rates have not increased existing interest rate costs for homeowners. Inflation was low in 2022 and 2023 (see Appendix chart 1, right) compared to the rest of the world. Household purchasing power has therefore not been eroded to the same extent as in other countries.
There has generally been strong growth in total lending in Greenland over a number of years, with annual growth rates of up to 16 per cent from 2019 to mid-2024 (see Appendix, chart 6, left). The growth in lending has thus exceeded the growth in nominal GDP.[4] Overall, this has led to an increase in the credit-to-GDP ratio, which is expected to reach 60 per cent by the end of 2023. The total credit in Greenland as a share of GDP remains relatively low in an international context, but has increased significantly from 2019 to 2023 (see Appendix, chart 4).
Over a number of years, there has also been strong growth in lending to businesses. There has been high growth in lending to the real estate sector, with lending doubling in the period from 2019 to mid-2024 (see Appendix, chart 6, right). The real estate sector also accounts for a significant share of lending in Greenland.
Increasing lending to the real estate sector is a particular source of systemic risk build-up. International experience suggests that developments in the commercial real estate market have played an important role in previous financial crises.[5]
Higher lending to the property sector means that institutions are more exposed to movements in property prices. There is increased exposure via the value of the collateral. At the same time high activity can lead to optimistic expectations of continued growth in property prices and activity. Overall, the valuation of collateral as well as the profitability of projects can be too optimistic. If the trend reverses, it could lead to major losses.
Strong growth in activity and lending when the economy is doing well means an overall build-up of systemic financial risks. During a period of high activity, it can be harder to assess the value of collateral and projects. When competition for customers is also intensified, it can increase the likelihood of a situation of excessive risk-taking in general.
In Greenland, there may be signs that institutions are underestimating risks and relaxing credit standards more than economic developments warrant. This is reflected in the interest rate spread by institutions on new loans to Greenlandic residents, which has decreased since the beginning of 2022 (see Appendix, chart 3).[6] The interest rate spread has fallen from around 6 per cent at the beginning of 2022 to just under 4 per cent at the end of Q2 2024.
The large public sector and the block subsidy act as shock absorbers in the Greenlandic economy. Regardless of the stabilising effects, large shocks can have a large impact on Greenland's economy with a downturn in the private sector, rising unemployment and falling tax revenues. Periods of lower nominal GDP growth and rising unemployment have historically resulted in higher impairment charges for banks.
Overall, the Council finds that a countercyclical capital buffer can contribute to addressing cyclical systemic risks.
The purpose of the buffer is to increase the resilience of institutions and ensure credit during periods of financial stress.
The countercyclical capital buffer is an instrument used to make the institutions more resilient by increasing the requirement for their capitalisation during periods in which risks build up in the financial system. If financial stress occurs with a risk of a severe tightening of credit, the buffer can be reduced with immediate effect, thus releasing capital to the institutions.
To the extent that the institutions do not use the released capital to absorb losses, they may use it for new lending or to secure their excess capital adequacy. This improves the possibility for credit institutions to maintain an adequate level of credit granting during periods of stress in the financial system. The buffer thus contributes to limiting negative effects on the real economy in the event of financial stress.
Institutions with credit exposures in Greenland can already meet a countercyclical capital buffer rate requirement of a total of 1 per cent with their current capital level. The phase-in period until 1 July 2026 also allows institutions to build up capital by retaining profits. Overall, the activation of the countercyclical capital buffer is therefore not expected to affect the ability of creditworthy customers to obtain financing.
The countercyclical capital buffer requirement is not a hard requirement. Institutions that do not comply with the requirement will therefore not lose their licence to operate as a bank. Instead, institutions will be required to submit a capital conservation plan to the Danish Financial Supervisory Authority, and there may be restrictions on the distribution of bonuses and dividends if they do not comply with the combined capital buffer requirements.[7]
Other capital adequacy requirements
The Council also takes into account other policy measures in its reflections on the countercyclical capital buffer rate. It takes into account other current requirements and the phasing-in of future requirements for the institutions, including the requirement for the institutions' eligible liabilities, MREL. [8] The MREL can be met with several types of capital and debt instruments, while the capital buffer requirement can only be met with CET1 capital. Institutions have sufficient time to retain profits and/or issue MREL debt to fulfil a fully phased-in MREL.
Christian Kettel Thomsen, Chairman of the Systemic Risk Council
Statements from the representatives of the ministries on the Council
Section 343 s (5) of the Financial Business Act states that recommendations addressed to the government must include statements from the representatives of the ministries on the Council. The representatives of the ministries and the Danish Financial Supervisory Authority do not have the right to vote on recommendations directed at the government.
[“The representatives of the ministries and the Danish Financial Supervisory Authority do not have the right to vote on recommendations addressed to the government.
The government will request Greenland’s self- government for an assessment of the recommendation with a view to an overall assessment of whether there is a basis 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.”].
[1] See the Council’s method paper on setting of the buffer rate (link).
[2] This applies to institutions in the Faroe Islands and Denmark, as well as other EU countries.
[3] See Søren Bjerregaard, Labour shortages increase the need for tight economic policy in Greenland, Danmarks Nationalbank Analysis (Greenlandic economy), no. 14, 1 November 2023(link).
[4] Lending growth is compared with a projection of nominal GDP growth as described in Appendix, chart 1, right.
[5] See also ESRB, Report on vulnerabilities in the EU commercial real estate sector (europa.eu); Understanding the Surge in Commercial Real Estate Lending (richmondfed.org).
[6] The interest rate spread indicates bank interest rates on new loans in Greenland relative to Danmarks Nationalbank’s leading monetary policy interest rate.
[7] In addition to the countercyclical capital buffer, the combined capital buffer requirement consists of the general systemic buffer, the capital conservation buffer and a SIFI buffer for systemically important institutions, referred to as SIFIs.
[8]The MREL requirement concerns eligible liabilities that can absorb losses and recapitalise an institution in a liquidation situation. The MREL requirement differs significantly from the countercyclical capital buffer. The purpose of the MREL requirement is to ensure that the institutions can be restructured or wound up without the use of government funds, and without such resolution having any substantial negative impact on financial stability. This purpose differs from the purpose of the countercyclical capital buffer, which is to make it possible for credit institutions to maintain an adequate level of credit granting during periods of stress in the financial system.