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 was enshrined in law with the Act on a Financial Stability Council, no. 66/2014, passed in May 2014. The framework includes the Financial Stability Council and the Systemic Risk Committee, which together constitute the authorities’ formal cooperation forum for financial stability.

 

Financial Stability Council

The Financial Stability Council is chaired by the Minister of Finance and Economic Affairs. Other members are the Governor of the Central Bank and the Director General of the Financial Supervisory Authority. The Council meets an average of four times a year, usually within two weeks after meetings of the Systemic Risk Committee. The Council shall report to Parliament on its activities at least once a year and shall keep the Cabinet informed of its activities and of official contingency measures to be adopted under extraordinary circumstances. The Committee is administered by the Ministry of Finance and Economic Affairs.

The Financial Stability Council may send the competent authorities recommendations concerning measures, other than the application of the Central Bank of Iceland’s monetary policy instruments, that are considered necessary at any given time to promote and preserve financial stability. The Council uses available data and the assessment and proposals of the Systemic Risk Committee to assess the factors that could pose a threat to financial stability and defines measures to combat them in the form of recommendations submitted to the relevant authorities. The Financial Stability Council shall publish its recommendations and the rationale behind them unless such publication is considered to have a negative impact on financial stability. If the authorities do not act on the Council’s recommendations, they must submit a written report to the Council, explaining the grounds for the decision.

The Financial Stability Council adopts procedural rules for its activities and formulates official policy on financial stability, in accordance with Articles 3 and 4 of the Act on a Financial Stability Council, no. 66/2014. This official policy includes six intermediate objectives that are conducive to financial stability:

  1.  to mitigate and prevent excessive credit growth, leverage, and asset market imbalances;
  2. to mitigate and prevent excessive maturity mismatches and market illiquidity, especially in foreign currencies;
  3. to limit direct and indirect exposure concentrations and cross-ownership links;
  4. to limit the systemic impact of misaligned incentives with a view to reducing moral hazard, especially on institutions that are regarded as systemically important;
  5. to mitigate and prevent the adverse impact of excessive capital in- and outflows that can amplify business cycles;
  6. to strengthen the resilience of financial infrastructure.

Further information on the Financial Stability Council can be found on its website: Financial Stability Council Financial Stability Council

Systemic Risk Committee

The Systemic Risk Committee works for the Financial Stability Council. Members are the Governor of the Central Bank, who acts as chair; the Director General of the Financial Supervisory Authority, who acts as vice-chair; the Deputy Governor of the Central Bank; the Deputy Director General of the Financial Supervisory Authority; and an outside expert appointed by the Minister. The Systemic Risk Committee meets at least four times a year, and more often if necessary. Administrative matters relating to the Committee are handled by the Central Bank. The Committee adopts procedural rules that the Financial Stability Council confirms, pursuant to Article 7 of the Act on a Financial Stability Council, no. 66/2014: Rules of procedure for the Systemic Risk Committee

The Systemic Risk Committee evaluates the current situation and outlook for the financial system, systemic risk, and financial stability for the Financial Stability Council. The assessment is based on analysis carried out by the Central Bank of Iceland and the Financial Supervisory Authority. The Systemic Risk Committee takes account of official policy on financial stability in its work. 

 

 

Macroprudential measure

If analysis carried out by the Financial Stability Council indicates that financial stability is under threat, the Council is to issue recommendation for appropriate measures. Measures that the Financial Stability Council may define further include but are not limited to capital buffers, rules on financial institutions’ lending activity, and rules designed to mitigate excessive fluctuations in capital flows.

The Financial Stability Council has published criteria for the classification of regulated entities as systemically important and has confirmed the systemic importance of four Icelandic entities: Landsbankinn hf., Arion Bank hf., Íslandsbanki hf., and the Housing Financing Fund.

The Financial supervisory authority has activated the following capital buffers on the recommendation of the Financial Stability Council: Decisions on capital buffers.


Capital buffer FSC recommendation FME decision Value Effective date
Systemic risk buffer, systemically important banks* 22.1.2016 1.3.2016 3.0% 1.1.2017
Systemic risk buffer, other deposit institutions 22.1.2016 1.3.2016 1.5% 2.0% 3.0% 1.1.2017 1.1.2018 1.1.2019
Capital buffer for systemic importance* 22.1.2016 1.3.2016 2.0% 1.4.2016
Countersyclical capital buffer 22.1.2016 30.9.2016 1.3.2016 1.11.2016 1.0% 1.25% 1.3.2017 1.11.2017
Capital conservation buffer 2.5% 1.1.2017
*Systemically important banks are Landsbankinn hf., Arion Bank hf., and Íslandsbanki hf.