The activities of financial undertakings are governed by Act No. 161/2002 on financial undertakings.[1] The role of the Central Bank of Iceland is, among other things, to provide forward-looking and risk-based supervision of the activities of financial undertakings, in particular through an analysis of their business models, assessment of their governance and internal controls, and evaluation of the main risk factors inherent in their activities. On the one hand, risk factors that may affect the equity of the financial undertaking in question are assessed, e.g. credit, counterparty and concentration risks, market risk and operational risk, and on the other hand, risk factors that may affect liquid funds and funding, or liquidity and funding risk. The implementation of the supervision is discussed in greater detail in General criteria and methodology for the supervisory review and evaluation process (only in Icelandic). Through its supervision, the Central Bank promotes the financial health of financial undertakings, sound and proper business practices, and the continued access of households and businesses to reliable and secure financial services. Supervision is governed by the Act on Financial Undertakings and Act no. 87/1998 on the Official Supervision of Financial Activities.
Legislation on prudential requirements and the supervision of financial undertakings is fundamentally the same in all Member States of the European Economic Area (EEA). The Act on Financial Undertakings implements Directive 2013/36/EU on access to the activity of credit institutions and the prudential supervision of credit institutions and investment firms (CRD IV), and Regulation (EU) No. 575/2013 on prudential requirements for credit institutions and investment firms (CRR). The directive and regulation form the backbone of EU legislation on prudential requirements and the supervision of financial undertakings.
The legislation sought to remedy shortcomings in the legal framework for credit institutions that were revealed by the international financial crisis that began in 2007–2008 and to implement international standards on prudential requirements for banks, the so-called Basel III standard, published by the Basel Committee on Banking Supervision. The measures are intended to strengthen financial stability, particularly through increased requirements regarding the quantity and quality of financial undertakings' own funds to make them better equipped to deal with difficulties. Since then, the EU has adopted several amendments to this legislation. The most significant changes were made by Directive (EU) 2019/878 (CRD V) and Regulation (EU) 2019/876 (CRR II). The implementation of these acts into Icelandic law was completed with an amendment to the Act on Financial Undertakings and other laws in June 2022.
In May 2024, the EU adopted two important acts amending CRD IV and CRR, or the so-called Banking Package 2021. The Banking Package consists of Directive (EU) 2024/1619 (CRD VI) and Regulation (EU) 2024/1623 (CRR III). The banking package is intended to complete the implementation of outstanding aspects of the aforementioned Basel III standard, particularly regarding capital requirements to cover credit, market and operational risks. However, changes that do not stem from the Basel III standard have also been made, such as regarding the qualifications of key personnel, branches from non-EEA countries, and risks related to environmental, social and governance (ESG) issues. Work is underway to implement the measures into Icelandic law.
[1] The establishment of investment firms and services and activities by financial undertakings is governed by Act no. 115/2021 on Markets in Financial Instruments. Legislation on prudential requirements and the supervision of investment firms will undergo significant changes with the implementation of a regulation (EU) 2019/2033 (IFR) and Directive (EU) 2019/2034 (IFD) in Icelandic law.