Foreign exchange balance
The Rules on Foreign Exchange Balance, no. 784/2018, took effect on 30 August 2018, and are issued in accordance with Article 24 of the Act on the Central Bank of Iceland, no. 92/2019, which authorises the Central Bank to set rules on credit undertakings’ foreign exchange balance. Such a balance shall, in addition to exchange rate linked assets and liabilities, cover off-balance sheet exchange rate linked assets and liabilities, such as options and forward contracts. The Rules supplanted the previous Rules on Foreign Exchange Balance, no. 950/2010 of 6 December 2010.
The purpose of the rules is to limit foreign exchange risk by preventing credit institutions’ foreign exchange balances from exceeding defined limits. The rules apply to consolidated credit institutions and parent companies – i.e., commercial banks, savings banks, and other institutions and associations that have been granted operating licences pursuant to the Act on Financial Undertakings, no. 161/2002, with subsequent amendments, and are collectively referred to as financial undertakings in the Rules on Foreign Exchange Balance.
Financial undertakings submit monthly reports on their foreign exchange balances; in addition, market makers in the interbank foreign exchange market submit daily reports on their foreign exchange balance. Each financial undertaking’s reporting includes itemised information on the current and forward balances of foreign assets and liabilities.
| Foreign exchange balance | A systemically important supervised entity | A credit undertaking that is not a systemically important supervised entity |
|---|---|---|
| Open foreign exchange balance in individual foreign currencies as % of capital base | 10% | 15% |
| Permissible total foreign exchange balance as % of capital base | 10% | 15% |
| But foreign exchange balance may never exceed | 25 b.kr. | 25 b.kr. |