Central Bank of Iceland collateralised loans
The Central Bank of Iceland provides financial undertakings with facilities in the form of collateralised loans, as do central banks in other countries. The collateral provided by the financial undertakings concerned must meet the conditions set forth in the Central Bank's Rules on Regular Facilities for Financial Undertakings, which are similar to the rules set by other central banks. Among the debt instruments that meet the requirements of the Rules are Treasury instruments and financial undertakings' debt instruments that fulfil defined minimum criteria, including credit rating criteria.
As is the case with other central banks, the Central Bank of Iceland has attempted, through its facilities, to facilitate the operations of domestic financial undertakings during the financial crisis currently sweeping the globe. To this end, the Central Bank followed the example of its counterparts in other countries and increased its facilities, thereby incurring greater risk; however, it expanded its facilities less than those central banks that expanded their facilities the most.
Following the insolvency of Iceland's three commercial banks, new banks were established to handle domestic commercial banking activities, and domestic deposit activity was transferred to these new banks. Consideration was also given to transferring the liabilities for securities pledged to the Central Bank to the new banks, so as to provide support for continued domestic banking activity. Upon closer scrutiny by the Financial Supervisory Authority and Government leaders, in consultation with domestic and foreign legal advisors, it was considered appropriate that all debt instruments issued by the previous banks should remain in those banks for the time being, so as to guarantee transparency and non-discrimination among creditors. At this point, it has not been finally decided what will be done with the above-mentioned Central Bank claims, nor is it clear whether – and how much – securities owned by the Central Bank may decline in value. It is unlikely that the Central Bank will emerge unscathed from the fall of the three banks, however, as such an outcome would have been virtually inconceivable. The result will be known when the committee appointed to assess the assets and liabilities of the new banks and their predecessors has completed its work. This committee is composed of foreign experts who will be assisted by Icelandic specialists as needed. This arrangement ensures that the assessment will be carried out in an objective manner, in accordance with the most rigorous professional standards. It is of paramount importance that the outstanding claims be recovered insofar as is possible so as to minimise the losses sustained by the banks' creditors.
October 21, 2008