The Faroese Systemic Risk Council is the macroprudential authority in the Faroe Islands. The European Union requires that all countries establish a macroprudential authority and other countries, e.g., Iceland and Norway, have also established such an authority.
A macroprudential authority works to articulate risks observed in the various economic sectors. The authority is especially focused on systemic risks.
A risk is deemed systemic when a weakness or an imbalance is observed in the financial system that increases the risk that a systemic financial crisis could materialize. This means that the risk is not only present for a specific financial institution, but also for all financial institutions and thus the entire financial system.
An example of a systemic financial risk could be a so-called “housing bubble” (meaning there is no connection between the asking price of a home and the true valuation of the underlying real estate), a deposit deficit in financial institutions, and the gathering of capital in only a few hands. Therefore, it is the actions of the financial sector and individual actors within the sector that have a major impact on the financial system through their various linkages to the real economy of the country, thus it is important maintain vigilant oversight of the multiple interactions within the financial system.
The Faroese Systemic Risk Council is a comprehensive and deliberate financial risk assessment advisory council that, along with the Governmental Bank, shall strive to ensure that the various oversight reviews of the economy and the financial sector not only include oversight of individual financial institutions or government entities or a selected sector, but also extend to the assessment of risks for the entire financial system and the country as a whole in order to prevent a financial crisis in the future and to limit and mitigate fluctuations in the Faroese economy.