Financial stability is a broad concept, but, in the main, it means that the financial structures of the country are sufficiently strong and resilient such that any problem or difficulty that erupts does not spread rampantly throughout the financial system thus ensuring that the fundamental services provided to citizens, businesses and government remain undisturbed.
The large financial banking institutions located in the Faroe Islands present a continuous risk for the Faroese economy. In addition, in the years ahead, savings held in pension funds in the Faroe Islands are expected to grow considerably. It is projected that the total pension savings in the Faroe Islands could amount to DKK 15-20 billion, if everyone takes advantage of the 15% wage deduction for pension savings that is authorized under current pension legislation. Moreover, there are a number of business entities within the Faroese financial sector that operate across a variety of business sectors, e.g., pension funds, insurance and banking. The natural resource industry and the large companies that operate within that sector are also of significant importance for the Faroese economy. At the same time, the government economy is especially susceptible to the major challenges inherent in long-term sustainability.
A risk is deemed systemic when a weakness or imbalance in the financial system increases the risk for a system-wide financial crisis to materialize. In addition, a risk is deemed systemic when the risk is considered to extend throughout all financial systems or a specific part of the systems and has significant ramifications for all systems, for example, an individual Systemically Important Financial Institution (SIFI) financial institution. Examples of a systemic risk could be a “housing bubble” (a situation where there is no correspondence between the asking price of a home and its intrinsic value), a shortfall or deficit in deposits in a financial institution, and the accumulation of capital in very few hands. Therefore, the financial sector and its various actors can have a major impact on the financial system of a country, especially its “real economy”, and thus it is important to remain vigilant at all times in this regard.