Financial stability refers to a situation in which financial structures are sufficiently strong and resilient enough to withstand crises, that problems arising from crises do not spread throughout the financial system, so that fundamental services provided to citizens, businesses and government are largely unaffected.
The large financial institutions in the Faroe Islands present a risks for the Faroese economy. Faroese pension savings are expected to grow considerably in the near future. Total pension savings could potentially grow up to DKK 15-20 billion, if everyone takes advantage of the 15% wage deduction for pension savings that is authorized under current pension legislation. A number of business entities in the Faroese financial sector operate across a variety of business sectors, e.g., pension funds, insurance and banking. The natural resource industry and large companies that operate within that sector are also of significant importance for the Faroese economy. At the same time, the national economy is especially susceptible to challenges inherent in efforts to reach long-term sustainability.
A risk is 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 extends 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.