29 December 2020
Central Bank lengthens adaptation period for minimum liquidity ratio in Icelandic krónur by one year
Amendments to the Rules on Credit Institutions’ Liquidity Ratios, no. 266/2017, requiring an additional minimum liquidity ratio in Icelandic krónur of 50%, took effect on 1 January 2020. The minimum requirement took effect at the time the Rules took effect, but credit institutions were granted a two-year adaptation period. When the Rules took effect, the ratio was 30%. It was scheduled to rise to 40% on 1 January 2021 and 50% on 1 January 2022. The Bank has now decided to extend the adaptation period by one year; i.e., the minimum liquidity ratio in Icelandic krónur will remain 30% through the end of 2021. It will then rise to 40% on 1 January 2022 and 50% on 1 January 2023. Liquidity ratios for all currencies combined and for all foreign currencies combined are unchanged at 100%.
The extension of the adaptation period for the minimum liquidity ratio in Icelandic krónur is in accordance with the Bank’s statements concerning facilitating credit institutions’ access to króna-denominated liquidity and using the scope provided for in the Rules where possible and appropriate. The Rules also state that, in general, credit institutions shall manage the currency composition of their liquid assets to correspond to their outflows. However, in view of the economic uncertainty still prevailing as a result of the COVID-19 pandemic, the Bank considers it desirable that credit institutions should have greater short-term flexibility in managing the currency composition of their liquid assets with respect to their króna-denominated liquidity position. As is stated above, no changes are made to the requirement that credit institutions hold liquid assets to cover short-term liabilities in all currencies combined. At present, the banks have strong liquidity ratios and an ample liquidity position; therefore, they have the capacity to support the economy during the current downturn by granting loans to businesses and households.
The text of Rules no. 1399/2020 amending the Rules on Credit Institutions’ Liquidity Ratios, no. 266/2017, with subsequent amendments can be found at the Ministerial Gazette website (in Icelandic).