New liquidity rules for credit institutions

The Central Bank of Iceland has issued new Rules on Liquidity Ratio, no. 1055/2013, in accordance with the provision contained in Article 12 of the Act on the Central Bank of Iceland, no. 36/2001. The Rules take effect on 1 December 2013, on which date the previous Central Bank Rules on Liquidity Ratio will become void.

The Rules on Liquidity Ratio are intended to ensure that credit institutions always have sufficient liquid assets to cover foreseeable and conceivable payment obligations over a specified period of time. After the collapse of the commercial banks, it became clear that it would be necessary to review the Bank’s liquidity rules and adopt revised rules incorporating new requirements for liquidity ratios in foreign currency. Among other new provisions in the new Rules, liquidity requirements now extend to off-balance sheet items and apply to credit institutions at the group level; furthermore, in their liquidity management, credit institutions are subjected to much tighter requirements as regards their reliance on liquidity lines, which proved extremely unreliable when put to the test in the prelude to the banking collapse of 2008. The purpose of the new rules on foreign currency liquidity is to reduce liquidity risk in foreign currencies, which proved to be one of the most significant risks during the run-up to the 2008 collapse. The amendments to the Act on the Central Bank of Iceland that were passed at the summer legislative session strengthened the Bank’s authorisation to set rules on foreign currency liquidity ratios. As is stated in the Bank’s 2012 report entitled Prudential rules following capital controls, such rules are part of the prudential framework that must be in place by the time the capital controls are lifted.

These rules are based on the standards developed by the Basel Committee on Banking Supervision which were issued in 2010 and their incorporation into European law this year via the so-called CRD IV package. The Central Bank Rules are therefore based on international rules but are adapted to Icelandic conditions, in part through the inclusion of requirements on foreign currency liquidity and the consideration given to risks related to the winding-up of the old banks.

Rules on credit institutions’ minimum net stable funding ratio (NSFR) in Icelandic krónur and foreign currency are currently in preparation. Such rules cover a longer horizon than liquidity rules and aim to limit maturity mismatches, particularly in foreign currencies. This is considered particularly important in view of Iceland’s recent experience and the prospective removal of the capital controls, which will require credit institutions to be well prepared to tolerate potential outflows of foreign-denominated liabilities.
The Rules on Liquidity Ratio, etc., no. 1055/2013, and the accompanying guidelines can be found here.
Further information can be obtained from Sigríður Benediktsdóttir at the Central Bank of Iceland, at tel. +354 569-9600.

No. 38/2013

2 December 2013