Financial stability

One of the Central Bank of Iceland´s main tasks is to promote an efficient and safe financial system, including domestic payment systems and foreign payment intermediation. In recent years many central banks have been given increasing emphasis to this task, which is felt necessary following the deregulation of international capital movements. At the global level, growing priority has been given to active supervision of financial activities and an overview of the financial system and macroeconomic risk factors, with the aim of preventing serious crises. The emphasis given to efficiency and safety is in line with the aim of most central banks to promote the security of the financial system, i.e., to ensure financial stability.

The financial stability functions of the Central Bank of Iceland are described further in a special decision by the Board of Governors - see here in a pdf-file.

The Central Bank seeks to promote the security of the financial system by closely monitoring the macroeconomic environment, relations between financial institutions and financial markets, the evolution of the financial system both in Iceland and elsewhere, its strength and efficiency, and the impact of economic factors on the system as a whole. Once a year, the Central Bank publishes the report Financial Stability. 

These activities differ from conventional financial system supervision insofar as they focus on factors which may represent risks for the financial system as a whole, rather than primarily monitoring the position of individual institutions. In order to contribute to a sound and healthy financial system, the Central Bank cooperates closely with the Financial Supervisory Authority.

A healthy financial system is a prerequisite for favourable economic development and effective monetary policy. In recent years, financial crises have struck in many parts of the world with widespread repercussions for the countries involved and for the global financial system. Financial shocks entail a disruption or sudden change in the activities of financial institutions or markets, with a significant, negative effect on economic developments. Difficulties experienced by a single financial institution, or sharp price changes in a single asset market, which do not have an extensive impact on the financial system as a whole and/or on economic activity, are therefore not categorized as financial shocks. The most serious consequences accompany banking shocks and currency shocks. Financial shocks which threaten the financial system as a whole may call for rescue measures by central banks and/or other public bodies. Hence it is vital to secure the foundations of the financial system in all countries and monitor factors which could undermine its credibility.

Under special circumstances, when the Central Bank considers its assistance necessary in order to preserve confidence in the national financial system, or when difficulties experienced by one institution could provoke a chain reaction, the Bank may intervene to bring that institution temporarily through difficulties caused by liquidity problems. If the bank concerned is domiciled in a Nordic country and has at least one cross-border establishment in the area the provisions of the Nordic central banks' MoU may apply.