Financial Stability

Central Bank of IcelandOne of the Central Bank of Iceland’s main tasks is to promote a safe, stable, and effective financial system. Financial stability means that the financial system is equipped to withstand shocks to the economy and financial markets, ensure the availability of capital, mediate credit and payments, and redistribute risks appropriately. A healthy financial system is essential to stability, growth, and effective monetary policy. Twice a year the department conducts an in-depth appraisal of the macroeconomic environment, financial markets, and financial institutions and publishes its findings in the Bank’s Financial Stability report.

Financial system

The Central Bank of Iceland Financial Stability Department carries out regular study and analysis of the risks that could undermine the stability of the Icelandic financial system, with the aim of identifying weaknesses that could lead to severe shocks. The department keeps abreast of the developments in the financial system in Iceland and abroad, as well as gauging its strengths and effectiveness and assessing the effects of economic factors on the system as a whole.


Foreign exchange balance

The Central Bank of Iceland sets rules on foreign exchange balance, as it is authorised to do by law. The purpose of the rules is to limit foreign exchange risk by preventing credit institutions’ foreign exchange balances from exceeding defined limits.


Liquidity and stable funding

The Central Bank of Iceland sets rules on credit institutions’ minimum liquidity, as it is authorised to do by law. The objective of the Rules on Liquidity Ratio, Etc., is to mitigate the adverse effects of financial market shocks that surface in liquidity shortages within one or more credit institutions. The rules on funding ratios in foreign currency are intended to ensure a minimum level of stable one-year funding in foreign currencies and thereby restrict the degree to which the commercial banks can rely on unstable short-term funding to finance long-term foreign-denominated lending.


Macroprudential policy

Macroprudential policy is comprehensive or system-wide supervision that entails overseeing the financial system as a whole, the interactions between the units it comprises, and the connections between the financial system and other parts of the economy. Iceland’s macroprudential framework comprises the Financial Stability Council and the Systemic Risk Committee, which together constitute the authorities’ formal cooperation forum for financial stability.