Capital Flow Measures
Temporary Provision III of the Foreign Exchange Act, no. 87/1992, cf. Act no. 42/2016 Amending the Foreign Exchange Act, authorised the Central Bank of Iceland to set rules, subject to prior approval by the Minister, providing for special reserve requirements due to new inflows of foreign currency in further specified cases. The purpose of the legislation was to provide the Central Bank of Iceland with a new policy instrument, commonly referred to as a capital flow management tool or capital flow management measure (CFM), so as to temper capital inflows to the country and affect the composition of such inflows.
The CFM is intended to reduce the risk that could accompany excessive capital inflows, thereby supporting domestic economic policy and contributing to macroeconomic and financial stability. The Central Bank of Iceland has, with Ministerial approval, set the Rules on Special Reserve Requirements for New Foreign Currency Inflows, no. 223/2019, which took effect on 6 March 2019 and supplanted the older Rules no. 490/2016 on the same subject, which took effect on 4 June 2016. The Rules contain provisions on the implementation of special reserve requirements for new foreign currency inflows, including the special reserve base, holding period, special reserve ratio, settlement currency, and interest rates on deposit institutions’ capital flow accounts with the Central Bank of Iceland and Central Bank certificates of deposit. The special reserve base is new inflows of foreign currency in connection with specified types of capital, particularly to include new investment in deposits and in electronically registered bonds and bills. In addition, new inflows in connection with loans granted for investment in these types of capital can form the special reserve base. The Rules also set the interest rate on capital flow accounts with the Central Bank of Iceland and Central Bank certificates of deposit at 0% and specify the Icelandic króna as the settlement currency.
The Act states that the holding period may range up to five years and that the special reserve ratio may range up to 75%; however, the Rules set the holding period at one year and the special reserve ratio at 0%. The Rules on Special Reserve Requirements for New Foreign Currency Inflows can be found here.
The information below could change in the event of amendments to the Foreign Exchange Act and rules set on the basis of the Act.
Special reserve requirement
Implementation of the special reserve requirement
What is ledger code 24 and capital flow account?
Repurchase transactions with certificates of deposit
How is the special reserve amount calculated?
How long is the holding period?
How are new inflows defined under Rules no. 223/2019?
Are balances on Code 24 accounts exempt from the so-called bank tax?
Are balances on Code 24 accounts exempt from conventional reserve requirements?
What is the settlement currency for the special reserve amount and the corresponding amount in capital flow accounts?
How may owners of special reserve amounts dispose of these funds at the end of the 12-month holding period?
How is the notification requirement for new inflows handled?
Where shall notification of the disposal of new inflows be sent?