06 January 2011

Financial Supervisory Authority and Central Bank of Iceland conclude improved cooperation agreement

The Financial Supervisory Authority and the Central Bank of Iceland have concluded a new cooperation agreement that provides for closer and more systematic collaboration than the previous agreement. The aim of the agreement is to promote a sound, effective, and safe financial system in Iceland, including payment and settlement systems. The Central Bank of Iceland and the Financial Supervisory Authority are required by law, according to Article 35 of the Act on the Central Bank of Iceland, no. 36/2001, and Article 15 of the Act on Official Supervision of Financial Activities, no. 87/1998, to conclude a cooperation agreement.

The agreement stresses that, in order for Iceland’s financial system to be sound, effective, and safe, it is necessary to define explicitly the responsibilities of each of the two institutions, as well as the division of tasks between them. It is no less important that the Financial Supervisory Authority and the Central Bank of Iceland work closely together at these defined tasks and that the acquisition and communication of information, both from financial undertakings and between the two supervisory institutions, be systematic. The analysis of stability must generate a clear picture of financial institutions’ strengths and weaknesses and their ability to respond to changes, both in the macroeconomic environment and in domestic and foreign markets. The supervisory institutions’ work must aim towards reducing systemic risk. The cooperation agreement also aims to ensure that coordinated contingency plans are in place and that the regulatory environment’s effectiveness in promoting financial system stability is assessed on a regular basis.

Among other new provisions, the agreement stipulates that the Director General of the Financial Supervisory Authority and the Governor of the Central Bank shall meet at least twice a year, together with relevant experts from both institutions, to assess systemic risk in the Icelandic financial system. The agenda of these meetings will include macroeconomic factors, risks of individual financial institutions, the interplay of risk factors (both within the financial system and between it and the real economy), the status of payment systems, the regulatory framework for financial activities, and improvements to contingency plans. Prior to the meetings, each of the two institutions shall summarise the status of the risk factors within its purview. Joint risk assessment groups will be appointed to handle functions where the roles of the two institutions overlap. The new cooperation agreement also provides for improvements in acquisition and reciprocal communication of information between the two institutions. The Financial Supervisory Authority and the Central Bank also intend to establish a joint access-controlled database.

Central Bank Governor Már Guðmundsson says the cooperation agreement between the Bank and the Financial Supervisory Authority is of high importance. “The new agreement creates the foundations for improved analysis of risks in the financial system, thereby contributing to financial stability. In this context, we have also taken into account current progress in this area internationally. The financial crisis that Iceland and other countries have battled in the past few years has revealed that closer cooperation between financial supervisors and central banks would have been beneficial. This new cooperation agreement is a vital step towards closing this gap, and it is hard to go much further under the current statutory framework.”

Gunnar Þ. Andersen, Director General of the Financial Supervisory Authority, stresses the importance of free flow of information between the Financial Supervisory Authority and the Central Bank, as the information from each institution contributes to the analysis carried out by the other. “In order to assess the current situation and anticipate the probable outlook for Iceland’s supervised entities, the Financial Supervisory Authority must, among other things, formulate an opinion on their economic soundness based on analysis of macroeconomic variables and forecasts of their development. The Financial Supervisory Authority looks to the Central Bank for such analysis.”

The full text of the cooperation agreement can be found here:

Cooperation Agreement between FSA and CBI (pdf)


No. 3/2011
6 January 2011