One of the Central Bank of Iceland’s main tasks is to promote a safe, stable, and efficient financial system. Financial stability prevails when there is no interruption or significant disturbance of financial system operations, and when the financial system is resilient enough to tolerate shocks and imbalances without significant adverse effects on movement of capital, intermediation of payments, and distribution of risk. A healthy financial system is a prerequisite for stability, output growth, and effective monetary policy. Each quarter the Bank‘s Financial Stability Department conducts an in-depth appraisal of the macroeconomic environment, financial markets and financial institutions. Semi-annually the results are published in the Bank‘s Financial Stability report.
The application of the Central Bank’s policy instruments to promote financial stability is determined by the Financial Stability Committee (FSN).
The Bank’s semi-annual Financial Stability report presents an overview of the strengths and weaknesses of the financial system and the macroeconomic and operational risks it may face. In addition, the report explains how the Central Bank carries out the tasks necessary for the operation of a sound and effective financial system.
Macroprudential policy centres on safeguarding the stability of the financial system as a whole by limiting the accumulation of systemic risk and by maintaining and shoring up the system’s resilience to such risk.
The Central Bank conduct a stress test on the systemically important banks each year. The aim of the test is to assess the banks’ resilience to a simulated but plausible economic shock.
Foreign exchange transactions in Iceland are unrestricted unless otherwise provided for by law. The same applies to cross-border payments and capital transfers. It is permissible, however, to take measures to prevent severe disruption of monetary, exchange rate, and financial stability.
The Central Bank of Iceland is entrusted by law with powers of resolution over Icelandic financial institutions. This entails the authorisation to take decisions on resolution procedures and apply resolution measures in the case of credit institutions and investment firms that are failing or likely to fail; i.e., those that are unable to service their liabilities or are highly likely to be unable to do so.