Recommendation on activation of the systemic risk buffer in the Faroe Islands
The Systemic Risk Council recommends the Minister for Industry, Business and Financial Affairs to activate a general systemic risk buffer on the Faroese Islands.
The Systemic Risk Council recommends that the Minister for Industry, Business and Financial Affairs set a general systemic risk buffer rate of 1 per cent for exposures in the Faroe Islands from 1 January 2018.
It is the task of the Systemic Risk Council, the Council, to identify and monitor systemic financial risks in the Faroe Islands. The Council may make recommendations on macroprudential measures concerning banks in the Faroe Islands. The purpose of introducing a general systemic buffer is to make the banks more resilient to strong fluctuations in the Faroese economy.
The Council assesses that the buffer rate should be further increased in the coming years. The Council will involve the Faroese authorities in the discussion of a suitable risk buffer rate level and the time horizon for phasing in the buffer rate to this level.
With a view to ensuring a level playing field for Faroese and foreign banks with exposures in the Faroe Islands, the Council advises the Minister to request authorities in other relevant countries to reciprocate the systemic risk buffer rate of 1 per cent for all Faroese risk exposures.
The government 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 assesses that the Faroese financial sector is vulnerable to the structural factors characterising the Faroese economy, cf. Appendix 1.
The Council finds that activation of the systemic risk buffer for the Faroe Islands can address these vulnerabilities. The aim of the buffer is to prevent and mitigate structural systemic financial risks. The buffer increases the banks' capitalisation, thereby enhancing their resilience to negative economic shocks. This contributes to ensuring financial stability in the Faroe Islands.
The Faroese banks are assessed to be able to meet a systemic risk buffer requirement of 1 per cent, given their current capitalisation. In addition, it is easier for the banks to increase their capitalisation in periods of economic recovery and positive earnings, as in the current situation.
The requirement that the banks must maintain a systemic risk buffer is not a "hard" requirement. Consequently, 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 buffer rate will be an add-on to the SIFI requirements, which are to be phased in by 2019, cf. the Appendix. The Minister for Industry, Business and Financial Affairs is responsible for setting the systemic risk buffer rate.
The Council's recommendation is in compliance with current legislation.
Lars Rohde, Chairman of the Systemic Risk Council
Statements from the representatives of the ministries on the Council
The Council has analysed the Faroese economic structures and interaction with the Faroese financial sector and has received input from the Faroe Islands. The Faroese economy has a concentrated business structure closely linked to fisheries and aquaculture. As the Faroese economy is a small, open economy, negative shocks to this industry and related industries may rapidly spill over to the whole Faroese economy.
The risk buffer is intended to make the Faroese credit institutions more resilient to losses, thereby enhancing their robustness against any potential future economic shocks. The purpose of activating the risk buffer is not to influence cyclical developments in the Faroe Islands.
The representatives of the ministries agree that it would be appropriate initially to set the systemic risk buffer rate for the Faroe Islands at 1 per cent from 1 January 2018.
For appendices, see PDF document.
 In 2016, it was decided to establish a Systemic Risk Council in the Faroe Islands. 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 Danish Systemic Risk Council.
 Authorities in other countries may exempt institutions with very small Faroese exposures from this requirement. To this end, the Council recommends an institution-specific limit of kr. 200 million, i.e. 1 per cent of total lending, including lending from abroad, in the Faroe Islands.
 In addition to the systemic risk buffer, the combined capital buffer requirement comprises the capital conservation buffer and the countercyclical capital buffer, cf. "Bekendtgørelse om opgørelse af det kombinerede kapitalbufferkrav mv." (Executive Order on Calculation of the Combined Capital Buffer Requirement etc.) issued by the Danish Financial Supervisory Authority on 16 December 2014 and the related memo, "Bestemmelser om kapitalbevaringsplan og opgørelse af det maksimale udlodningsbeløb" (Provisions on a capital conservation plan and calculation of the maximum distributable amount) on the Danish Financial Supervisory Authority's website.