25. janúar 2016

First meeting of the Financial Stability Council in 2016

The first meeting of the Financial Stability Council in 2016 was held on Friday 22 January at the Ministry of Finance and Economic Affairs. The topic of the meeting was risk in the financial system. It was revealed that the outlook is for increased imbalances in the domestic economy in the coming term. System-wide credit growth is still within modest limits, but it is likely that demand for credit will grow in the near future. The interactions between macroeconomic imbalances and credit growth could have a negative impact on the financial system. The banks' resilience is still considerable, but their liquidity is being monitored carefully, particularly in view of the settlement of the failed banks' estates and the upcoming auction in connection with the release and tie-up of offshore krónur.

Capital buffers were the main topic of the meeting, as statutory provisions on capital buffers, recently added to the amended Act on Financial Undertakings, no. 161/2002, took effect on 1 January 2016. With reference to the Systemic Risk Committee's analysis, the Financial Stability Council recommends to the Financial Supervisory Authority that three capital buffers be introduced: a capital buffer for systemically important financial institutions, a systemic risk buffer, and a countercyclical capital buffer. The capital conservation buffer took effect at the turn of the year, cf. Article 84(e) of the Act on Financial Undertakings, no. 161/2002; therefore, it requires no recommendations from the Financial Stability Council.

The Financial Stability Council makes the following recommendations to the Financial Supervisory Authority:

1) That a 2% capital buffer be imposed on systemically important financial institutions, at the group level effective 1 April 2016. Systemically important financial institutions are Arion Bank hf., Íslandsbanki hf., and Landsbankinn hf., as defined at the Financial Stability Council meeting of 14 April 2015.

2) That a systemic risk buffer, in the amount of 3% of risk-weighted domestic assets, be imposed on systemically important deposit-taking institutions – Arion Bank hf., Íslandsbanki hf., and Landsbankinn hf. – effective 1 April 2016. Other deposit-taking institutions'[1] systemic risk buffer shall rise incrementally, as follows: to 1% of risk-weighted domestic assets as of 1 April 2016, to 1.5% as of 1 January 2017, to 2.0% as of 1 January 2018, and to 3% as of 1 January 2019. The capital buffer shall be imposed on these institutions at the group level.

3) That a 1% countercyclical capital buffer be imposed on all financial institutions at both group and parent company levels, apart from those institutions that are exempt from capital buffers pursuant to Article 84(d), Paragraph 4 of the Act on Financial Undertakings, no. 161/2002, and that it take effect twelve (12) months after the date of the Financial Supervisory Authority decision.

The outlook does not indicate that a decision on the value of the capital buffers will require a substantial increase in financial system capital from the current level, as the Financial Supervisory Authority has recommended ever since the 2014 appraisal and assessment was carried out that certain deposit-taking institutions assume that capital buffers would be imposed upon them. The Financial Stability Council's recommendations assume that an adaptation period will be granted so as to allow institutions to adjust to the increased capital requirements. Based on the current capital position in the financial system, the necessary capital increase because of these buffers will be about 9 b.kr. in Q1/2017, or 1.5% of deposit-taking institutions' current total capital. In neighbouring countries, the imposition of capital buffers has been handled in accordance with the conditions prevailing in each country. Implementation differs from one country to another, but most countries have imposed at least two buffers.

Accompanying this press release are the Financial Stability Council's recommendations to the Financial Supervisory Authority, including more detailed rationale for the capital buffers. Accompanying the recommendations are appendices for each capital buffer, a short report on the impact of the capital buffers on the financial system, and a discussion of capital buffers in Iceland's neighbouring countries. If the Financial Supervisory Authority decides not to act on the recommendations, it is required that this decision be supported by a written response to the Financial Stability Council within thirty (30) days.

[1] Kvika banki hf., Sparisjóður Austurlands hf., Sparisjóður Höfðhverfinga ses. Sparisjóður Strandamanna ses., and Sparisjóður Suður-Þingeyinga ses.