Liquidity and stable funding

According to Article 83, Paragraph 4 of the Act on Financial Undertakings, no. 161/2002, the Central Bank of Iceland issues liquidity rules, on the one hand, and net stable funding rules, on the other, in accordance with Paragraphs 1 and 2 of the provision. In these rules, the Bank may specify minimum and average liquidity, as well as minimum stable funding in Icelandic krónur and foreign currencies, as is explained below. Furthermore, it is permissible to specify that different provisions shall be applicable to different categories of financial undertakings.


Liquid assets

The Rules on Credit Institutions’ Liquidity Ratios, no. 266/2017, took effect on 31 March 2017 and superseded the previous Rules, no. 1031/2014. As is noted above, the Rules are set on the basis of Article 83, Paragraph 4 of the Act on Financial Undertakings, no. 161/2002. The adoption of the new Rules in 2017 harmonised the Icelandic regulatory framework with the current European framework as provided for in Commission Delegated Regulation (EU) 2015/61.

The aim of the liquidity rules is to mitigate credit institutions’ liquidity risk by ensuring that they always have sufficient liquid assets to fulfil their obligations under stressed conditions over a specified period of time. The Rules also require that credit institutions have available highly liquid assets as these are defined in the Rules, not only to cover their obligations when due but also to cover potential outflows stemming from withdrawals of deposits, reduced availability of funding, increased collateral requirements, or other circumstances requiring financial outlays under stressed conditions over a 30-day period. The liquidity ratio is calculated using the following formula:


            Liquidity ratio (%) = Liquidity buffer/(Net liquid outflows over the coming 30 days)


According to the Rules, credit institutions’ liquidity ratio in domestic and foreign currencies combined shall be at least 100% at all times; however, credit institutions are also required to ensure that the currency composition of their liquid assets is aligned with the currency composition of their net outflows. The Central Bank also requires that credit institutions’ liquidity ratio in all foreign currencies combined be at least 100% at all times. In addition, effective 1 January 2020, the liquidity ratio in Icelandic krónur must be at least 50%.

The Rules apply to parent companies and to the group for which a credit institution acts as the parent company. Credit institutions are obliged to send the Central Bank reports at least once a month, providing information underlying the calculation of their liquidity ratios. Liquidity reports for both parent companies and consolidated entities must be submitted to the Bank by the fifteenth day of each month. Liquidity requirements according to the Rules include the 30-day liquidity ratio and must be satisfied at all times. If a credit institution should fall below the minimum, or if it is foreseeable that it will fall below the minimum within the next six months, the institution shall immediately send the Central Bank a written report outlining the reasons for the deviation. The credit institution concerned shall also present a dated schedule of how it intends to restore its liquidity ratio to the regulatory minimum.

In addition to the liquidity reports, credit institutions shall submit deposit and funding summaries (additional monitoring metrics reports, or AMM) for informational purposes. They shall also provide all of the information that the Central Bank requires in order to better assess the liquidity position of the credit institution concerned or to conduct stress testing. Reports are submitted in XBRL format.

 

Rules and reporting

 

Liquidity ratio Credit institution Credit institutions whose weighted outflows in foreign currencies are less than 5 b.kr.
Liquidity ratio for all currencies combined 100% 100%
Liquidity ratio for all foreign currencies combined 100% Weighted inflows in foreign currencies net of weighted outflows in foreign currencies
Liquidity ratio for Icelandic krónur 50% 50%


Stable funding

The Rules on Credit Institutions’ Minimum Net Stable Funding Ratios, no. 750/2021, took effect on 28 June 2021. The Rules introduced a 100% overall stable funding ratio. They supersede the previous Rules no. 1032/2014, which required that commercial banks maintain a 100% funding ratio in foreign currencies.

The Rules on Net Stable Funding Ratios aim to restrict maturity mismatches between credit institutions’ assets and liabilities and limit the extent to which credit institutions rely on unstable short-term funding to finance long-term assets. The NSFR is calculated as the ratio of available stable funding to required stable funding.


            Net stable funding ratio (%) = (Available stable funding)/(Required stable funding)


Required stable funding refers to assets on and off the balance sheet, multiplied by the appropriate weight. It varies directly with the share of long-term of illiquid assets. The loan portfolio, for instance, carries different weights, depending on loan type and maturity. The higher required stable funding is, the more available stable funding is needed. Available stable funding includes, for example, equity, liabilities with a residual maturity longer than one year, and other long-term funding.

According to the Rules, credit institutions must submit reports and maintain a 100% stable funding ratio in all currencies combined, and they shall monitor ratios in significant currencies; i.e., individual currencies in which total obligations equal or exceed 5% of the institution’s total liabilities. The Rules on Credit Institutions’ Minimum Net Stable Funding Ratios are based entirely on the provisions of Regulation (EU) 2019/876 of the European Parliament and of the Council (CRR II) as regards net stable funding ratio requirements. According to the Rules, credit institutions are under a general obligation to ensure that the currency composition of their funding is aligned with the currency composition of their assets, with consideration given to weights as specified in the Rules. The Rules also authorise the Central Bank to require that credit institutions minimise their currency mismatches by restricting the proportion of required stable funding in specified currencies that may be met with available stable funding in other currencies. Such restrictions apply only to the accounting currency or any currency above the aforementioned reference limits.

The Rules apply to parent companies and to the group for which a credit institution acts as the parent company. Credit institutions shall submit stable funding reports to the Central Bank on at least a quarterly basis, in the form specified in Commission Regulation (EU) 2021/451. If a credit institution should fall below the regulatory minimum, or if it is foreseeable that it will fall below the regulatory minimum, the institution shall immediately send the Central Bank a written report outlining the reasons for the deviation. The credit institution concerned shall also present a dated schedule of how it intends to restore its liquidity ratio to the regulatory minimum.

It shall also provide all of the information that the Central Bank requires in order to assess the institution’s funding risk more effectively. Reports are submitted in XBRL format.


Rules, template, and guidelines


Stable funding Credit institutions
Net stable funding ratio in all currencies combined 100%