Faroe Islands

The Systemic Risk Council can make recommendations, observations and warnings about Faroese circumstances. Representatives from the relevant Faroese authorities can be invited to participate in the discussions of the Council as observers, when the discussions concern Faroese circumstances.

The Systemic Risk Council is responsible for identifying and monitoring systemic financial risks in the Faroe Islands, and can make recommendations on macroprudential initiatives targeted at banks in the Faroe Islands. Recommendations on macroprudential measures are to be addressed to the Minister for Industry, Business and Financial Affairs. The Minister is responsible for setting the capital buffer rates for the Faroe Islands.

Faroe Islands

Analysis of the Faroese banking sector

The Council, in cooperation with the Faroese Risk Council, has analysed the Faroese banking sector, including SIFI designation and SIFI requirements. The analysis consists of six sections:

  • Summary and assessment
  • Faroese banking sector, including SIFIs in the Faroe Islands
  • Capital buffer requirements and risk weights
  • Capital requirements and lending
  • SIFI requirements, including SIFI buffer and MREL requirements
  • Systemic risk buffer and countercyclical capital buffer
FAROE ISLANDS

BACKGROUND

Danish financial regulation, including Danish legislation implementing EU directives, is implemented in the Faroe Islands via decrees that may take into account special Faroese circumstances.

The decree whereby the rules on the Systemic Risk Council enter into force in the Faroe Islands took effect on 1 February 2015.

The decrees concerning determination of the countercyclical capital buffer took effect on 1 July 2015 for the Faroe Islands.

FAROE ISLANDS

GENERAL SYSTEMIC BUFFER

18 March 2020

As a reaction to the uncertainty and the challenges posed by the current covid-19 outbreak, the Council recommends the Minister for Industry, Business and Financial Affairs to temporarily reduce the systemic risk buffer in the Faroe Islands to 2 per cent.

Read the recommendation here

The Minister has followed the Council's recommendation to immediately suspend the latest increase to the systemic buffer in the Faroe Islands from 2 per cent to 3 per cent.

Read the Minister's response here (Danish only)

The purpose of the general systemic buffer is to enhance the banks' resilience to large fluctuations in the Faroese economy. 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.

The Council finds that activation of the systemic risk buffer for the Faroe Islands may address these 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.

Current systemic buffer rate in the Faroe Islands

2 per cent

The minister has followed the Council's recommendations on changes to the systemic buffer.

FAROE ISLANDS

COUNTERCYCLICAL CAPITAL BUFFER

The countercyclical capital buffer is a requirement to banks' buffers that varies with the developments of systemic financial risks. The Council regularly assesses the countercyclical capital buffer rate in the Faroe Islands, and publishes after each meeting the key indicators on which the assessment of the countercyclical capital buffer rate relies. The Council's assessment relies on further information in addition to the key indicators such as other indicators and policies.  

Current countercyclical capital buffer rate in the Faroe Islands

0 per cent


Each quarter the Minister for Industry, Business and Financial Affairs sets the countercyclical capital buffer rate for the Faroe Islands, Denmark and Greenland.

Faroe Islands

SIFI designation in the Faroe Islands

The council published on 4 March 2020 a recommendation that a lower limit should be introduced for when a bank in the Faroe Islands is designated as a systemically important financial institution.

Systemically important financial institutions (SIFIs) are today designated on the basis of a number of indicators measuring the bank’s size in relation to the Faroese economy and banking sector. As the Faroese economy is small, even small banks can achieve SIFI status. A lower limit for the absolute size of a bank will mean that very small banks are no longer designated as SIFIs and thus do not have to meet the additional requirements imposed on SIFIs

The Council, in cooperation with the Faroese Risk Council, has analysed the Faroese banking sector, including SIFI designation and SIFI requirements.