Financial Stability Committee

The Central Bank of Iceland’s Financial Stability Committee (FSN) takes decisions on the application of the Central Bank’s financial stability policy instruments, as is provided for in the Act on the Central Bank of Iceland, no. 92/2019. Decisions taken by the Financial Stability Committee must be based on a thorough assessment of the current situation and outlook for the financial system. Examples of financial stability policy instruments include rules on financial institutions’ capital buffers, foreign exchange balance, and liquidity and net stable funding, as well as rules restricting the risk that borrowers may take, such as restrictions on loan-to-value ratios and debt service-to-income ratios.

Members of the Financial Stability Committee are the Governor of the Central Bank, the three Deputy Governors, and three experts in financial market affairs or economics who are appointed by the Minister responsible for financial stability for a term of five years. The Permanent Secretary or an appointed official from the Ministry responsible for financial stability also participates in Committee meetings as a non-voting member with the right to address the meeting and present proposals. The composition of the Financial Stability Committee shall be such that the Committee’s members collectively possess sufficient expertise, qualifications, and experience to carry out the tasks entrusted to it. The Minister may only appoint the same person to the FSN twice. The Governor chairs the Financial Stability Committee, and the Deputy Governor for Financial Stability serves as vice-chair.

The tasks of the Financial Stability Committee are to:

• Assess the current situation and the outlook for the financial system, systemic risk, and financial stability. Systemic risk is the risk that interactions between the financial system and the domestic economy will exacerbate cyclicality, the risk that financial undertakings will become vulnerable to actions taken by other parties, and the risk of a chain of events that could jeopardise financial stability, with the associated adverse effect on the domestic economy. Systemic risk can therefore arise from the interplay among economic activity, market developments, a wide range of financial instruments, and the rights, responsibilities, and activities of a number of individuals and businesses in the economy.
• Discuss and define the actions deemed necessary at any given time in order to affect the financial system so as to strengthen and preserve financial stability and, to this end, make recommendations to the appropriate Governmental authorities when warranted.
• Approve Governmental directives and take the decisions entrusted to the Committee by law.
• Decide which supervised entities, infrastructure components, and markets shall be considered systemically important and of such a nature that their activities could affect financial stability.

The Financial Stability Committee meets at least four times a year. In addition, the Committee may meet if its Chair or three of its members so request. The FSN has adopted rules of procedure that include provisions on the preparation of, rationale for, and presentation of its decisions. The Central Bank of Iceland Supervisory Board has ratified the Committee’s rules of procedure. The FSN’s decisions on the application of financial stability policy instruments are issued publicly and an explanation given for the rationale underlying the decisions and the Committee’s assessment. In general, the Committee’s statements are published before the market opens on the day after the meeting in question. The minutes of FSN meetings are published four weeks later, unless such publication could be expected to have an adverse impact on financial stability. Further information on this can be found in the aforementioned rules of procedure.

Meetings of the Financial Stability Committee shall be deemed to have a quorum if five of its seven members are in attendance. Decisions by the Committee are taken by a simple majority of votes; in the case of a tie, the Chair shall cast the deciding vote.

The Financial Stability Committee reports to Parliament on its work once a year. The report is discussed in the Parliamentary committee of the Speaker’s choosing.

The Act on the Central Bank of Iceland stipulates that once each year, the Financial Stability Committee shall submit to Parliament a report on its activities and that the contents of the report shall be discussed in the Parliamentary committee of the Speaker’s choosing. The Parliamentary Economic Affairs and Trade Committee has been tasked with discussing the Committee’s reports.