Amended Rules on Liquidity Coverage Requirements for Credit Institutions
Today the Central Bank of Iceland published Rules no. 1170/2019 amending the Rules on Liquidity Coverage Requirements for Credit Institutions, no. 266/2017. The amending Rules, also published today in the Law and Ministerial Gazette (Stjórnartíðindi), will take effect on 1 January 2020. The amendments implement a 50% minimum liquidity ratio in Icelandic krónur.
The Rules on Liquidity Coverage Ratio are intended to ensure that credit institutions always have liquid assets to cover foreseeable and conceivable payment obligations over a specified period of time. The Rules require that credit institutions have liquid assets available 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.
According to the current Rules, credit institutions’ liquidity ratio in all currencies combined shall be at least 100% at all times. In addition, their liquidity ratio in all foreign currencies combined shall be at least 100% at all times. Under the amending Rules, credit institutions will also be required to maintain a liquidity coverage ratio in Icelandic krónur of at least 50%.
Because credit institutions’ balance sheets and liquidity risk are largely in Icelandic krónur, the Central Bank considers it appropriate to require that they hold liquidity reserves in krónur. It is important that credit institutions have króna-denominated liquid assets that will enable them to handle normal outflows, intraday and intraweek fluctuations, and outflows of large deposits without difficulty. In determining the permissible minimum liquidity ratio in Icelandic krónur, the Central Bank takes into account that a wider variety of high-quality liquid assets are denominated in foreign currencies. In addition, deposits held with the Central Bank in fulfilment of minimum reserve requirements are not classified as liquid assets in the sense of the liquidity rules. The same is true elsewhere in the European Economic Area (EEA), but on the other hand, Iceland’s reserve requirements are higher than in many other economies. Moreover, credit institutions’ liquidity ratios are somewhat volatile, and it should be assumed that in general, the liquidity ratio in Icelandic krónur will have to be higher than the minimum specified in the Rules. In view of this, the Central Bank considers it sufficient to set the minimum liquidity ratio in Icelandic krónur at 50%.
Other amendments that follow from the aforementioned minimum liquidity ratio in Icelandic krónur have also been made to the Rules. In addition to these, minor, non-substantive amendments have been made as well.
Further information can be obtained from the Governor of the Central Bank of Iceland, at tel: +354 569-9600.