One of the Central Bank of Iceland’s main tasks is to promote a safe, stable, and effective financial system. Financial stability means that the financial system is equipped to withstand shocks to the economy and financial markets, ensure the availability of capital, mediate credit and payments, and redistribute risks appropriately. A healthy financial system is essential to stability, growth, and effective monetary policy.
The Central Bank of Iceland Financial Stability Department carries out regular study and analysis of the risks that could undermine the stability of the Icelandic financial system, with the aim of identifying weaknesses that could lead to severe shocks. Twice a year the department conducts an in-depth appraisal of the macroeconomic environment, financial markets, financial institutions, and payment systems. The appraisal is published in the Bank’s Financial Stability report (see Publication).
The purpose of the Central Bank of Iceland’s Financial Stability report is:
- To promote informed dialogue on financial stability; i.e., its strengths and weaknesses, the macroeconomic and operational risks that it may face, and efforts to enhance its resilience;
- To provide an analysis that is useful for financial market participants in their own risk management;
- To focus the Central Bank’s work and contingency planning;
- To explain how the Central Bank fulfils its statutory mandate with respect to an effective and sound financial system.
The department keeps abreast of the developments in the financial system in Iceland and abroad, as well as gauging its strengths and effectiveness and assessing the effects of economic factors on the system as a whole. The tasks of central banks in this field differ from conventional financial supervisory functions in that, instead of primarily monitoring individual financial institutions, they focus on factors that could entail risks for the financial system as a whole. In order to promote a sound and healthy financial system, the Central Bank of Iceland works closely with the Financial Supervisory Authority.