Liquidity and stable funding

According to Article 117(b), Paragraph 3 of the Act on Financial Undertakings, no. 161/2002, the Central Bank of Iceland issues liquidity rules, on the one hand, and net stable funding rules, on the other. In these rules, the Bank may specify minimum and average liquidity, as well as minimum stable funding in Icelandic krónur and foreign currencies, as is explained below. Furthermore, it is permissible to specify that different provisions shall be applicable to different categories of financial undertakings.

Liquid assets

The Rules on Credit Institutions’ Liquidity Coverage Ratios (“LCR”), no. 1520/2022, took effect on 1 January 2023 and superseded the previous Rules, no. 266/2017. The Rules are set based on the authorization in Article 117(b), Paragraph 2, Item 82 and Article 117(b), Paragraph 3 of the Act on Financial Undertakings, no. 161/2002. With their adoption, the current European regulatory framework in this area is implemented, specifically Commission Delegated Regulation (EU) 2015/61 (“LCR DR”) and subsequent amendments.

The aim of the liquidity rules is to mitigate credit institutions’ liquidity risk by ensuring that they always have sufficient liquid assets to fulfil their obligations under stressed conditions over a specified period. LCR DR requires that credit institutions have available high quality liquid assets (“HQLA”) as these are defined in the Regulation, not only to cover their obligations when due but also to cover potential outflows stemming from withdrawals of deposits, reduced availability of funding, increased collateral requirements, or other circumstances requiring financial outlays under stressed conditions over a 30-day period. The liquidity ratio is calculated using the following formula:

            Liquidity ratio (%) = Liquidity buffer/(Net liquid outflows over the coming 30 days)

 

With the LCR rules, LCR DR and subsequent amendments are implemented in full by citation contained in Article 4 of the Rules. The Rules also contain provisions laying down specific LCR requirements; cf. Article 3 of the Rules. According to LCR DR, credit institutions must submit reports and maintain a 100% liquidity coverage ratio in all currencies combined, and they shall monitor ratios in significant currencies, i.e., individual currencies in which total obligations equal or exceed 5% of the institution’s total liabilities. According to the Rules, credit institutions are under a general obligation to ensure that the currency denomination of their liquid assets is consistent with the distribution by currency of their net liquidity outflows, with consideration given to weights as specified in the Rules. The Central Bank may require that credit institutions restrict currency mismatch by setting limits on the proportion of net liquidity outflows in a currency that can be met during a stress period by holding liquid assets not denominated in that currency. That restriction may only be applied for the reporting currency or a significant currency.

The LCR rules require that credit institutions maintain a liquidity coverage ratio in Icelandic krónur of at least 50%; cf. Article 3, Paragraph 1 of the Rules. They must also maintain a liquidity coverage ratio in euros of at least 80%, if euro-denominated liabilities constitute 10% of more of their total liabilities; cf. Article 3, Paragraph 2 of the Rules.

The Rules apply to parent companies and to the group for which a credit institution acts as the parent company. Credit institutions are obliged to send the Central Bank monthly reports providing information underlying the calculation of their liquidity ratios, in the form specified in Commission Implementing Regulation (EU) 2021/451; cf. the Rules on Reporting by Financial Undertakings, no. 1163/2022. Liquidity reports for both parent companies and consolidated entities must be submitted to the Bank by the fifteenth day of each month. Liquidity requirements include the 30-day liquidity ratio and must be maintained at any time. If a credit institution does not meet, or expects not to meet the minimum requirements according to the Rules, it shall immediately notify the Central Bank and shall submit without undue delay a plan for the timely restoration of compliance, cf. Art. 4 (4) of LCR DR.

In addition to the liquidity reports, credit institutions shall submit deposit and funding summaries (additional monitoring metrics reports, or AMM) for informational purposes. They shall also provide all the information that the Central Bank requires to better assess the liquidity position of the credit institution concerned or to conduct stress testing. Reports are submitted in XBRL format via the Central Bank’s data submission system.

 

Rules and reporting

 

Liquidity ratio Credit institution
Liquidity ratio for all currencies combined 100%
LCR in euros for credit institutions whose euro-denominated liabilities equal 10% or more of their total liabilities 80%
Liquidity ratio for Icelandic krónur 50%

Stable funding

The Rules on Credit Institutions’ Minimum Net Stable Funding Ratio (“NSFR”), no. 750/2021, took effect on 28 June 2021, superseding the previous Rules no. 1032/2014. The Rules are based on Article 117(b), Paragraph 3 of the Act on Financial Undertakings, no. 161/2002. The NSFR rules are based entirely on the provisions of Regulation (EU) 2019/876 of the European Parliament and of the Council (CRR II) as regards net stable funding ratio requirements.

The NSFR rules aim to restrict maturity mismatches between credit institutions’ assets and liabilities and limit the extent to which credit institutions rely on unstable short-term funding to finance long-term assets. The NSFR is calculated as the ratio of available stable funding to required stable funding:

 

            Net stable funding ratio (%) = (Available stable funding)/(Required stable funding)

 

Required stable funding refers to assets on and off the balance sheet, multiplied by the appropriate weight. It varies directly with the share of long-term or illiquid assets. The loan portfolio, for instance, carries different weights, depending on loan type and maturity. The higher required stable funding is, the more available stable funding is needed. Available stable funding includes, for example, equity, liabilities with a residual maturity longer than one year, and other long-term funding.

According to the Rules, credit institutions must submit reports and maintain a 100% stable funding ratio in all currencies combined, and they shall monitor ratios in significant currencies, i.e., individual currencies in which total obligations equal or exceed 5% of the institution’s total liabilities. According to the Rules, credit institutions shall ensure that the distribution of their funding profile by currency denomination is generally consistent with the distribution of their assets by currency. The Central bank may require institutions to restrict currency mismatches by setting limits on the proportion of required stable funding in a particular currency that can be met by available stable funding that is not denominated in that currency. That restriction may only be applied for a significant currency.

The Rules apply to parent companies and to the group for which a credit institution acts as the parent company. Credit institutions shall submit stable funding reports to the Central Bank on at least a quarterly basis, in the form specified in Commission Implementing Regulation (EU) 2021/451; cf. the Rules on Reporting by Financial Undertakings, no. 1163/2022. If a credit institution does not meet or expects not to meet the minimum requirement according to the NSFR Rules, it shall immediately notify the Central Bank and shall submit without undue delay a plan for the timely restoration of compliance, cf. Art. 428b (3) of CRR II.

Furthermore, it shall provide all the information that the Central Bank requires to assess the institution’s funding risk more effectively. Reports are submitted in XBRL format via the Central Bank’s data submission system.

Rules, template, and guidelines

 

Stable funding Credit institutions
NSFR in all currencies combined 100%