Macroprudential policy

Macroprudential policy centres on safeguarding the stability of the financial system as a whole by limiting systemic risk. Its main objective is to enhance stability and increase resilience, thereby reducing the risk of financial shocks. In order to achieve its macroprudential objectives, the Central Bank of Iceland has macroprudential tools that it can apply when warranted. These tools generally take the form of Central Bank rules, including rules on capital buffers for financial institutions, foreign exchange balance, liquidity, and net stable funding, as well as rules restricting loan-to-value ratios and loan-to-income or debt service-to-income ratios for consumer mortgages. Decisions on the application of macroprudential tools are taken by the Financial Stability Committee. The Committee bases its decisions on an analysis of the position of the financial system, the financial markets, the economy as a whole, systemic risk, and resilience against potential shocks. The Central Bank also carries out stress tests to evaluate resilience and conducts scenario analyses of key risk factors.