Banks play a key role in every society. They channel funds from those who save money to those who want to borrow, whether to invest in housing, buy a car, or start a business. In this way, banks facilitate investment and development in society. They are also intermediaries in all kinds of transactions, i.e. between buyers and sellers of goods and services by transferring money from the accounts of those who buy to those who sell, e.g. via payment cards or online transactions. Banks are therefore key players in payment intermediation in Iceland, whether people use cards, online banking or banknotes and coins.
How do we promote stability in the financial system?
The activities of financial institutions are subject to strict rules that are supervised by the Central Bank of Iceland. In this way, we reduce the likelihood that banks and savings banks will encounter significant difficulties and be unable to fulfil their role in the intermediation of savings and loans. After the 2008 financial crisis, various rules were tightened and working procedures improved to prevent other situations of this kind occurring again. The Central Bank uses various measures, such as conducting stress tests on large banks annually, which involves the Central Bank collecting important data from the banks to thus be in a position to assess whether they meet the conditions set for them. Banks also have to comply with specific rules that promote stability in the financial system. These rules are often called macroprudential rules, but they deal, among other things, with how much equity banks must hold.
But what happens to my money if banks or savings banks become insolvent (go bust)?
If a bank or savings bank becomes insolvent (goes bust), the Central Bank of Iceland's financial supervisory authority can revoke the entity's operating licence. In such circumstances, the deposits of those who have money in accounts with the bank or savings bank are insured up to a certain limit. The Depositors and Investors' Guarantee Fund is responsible for paying out deposits that are insured by banks and savings banks for an amount of up to EUR 100,000.
If it becomes apparent that banks or financial institutions will become insolvent, the Central Bank has the authority to take the company in question into so-called resolution proceedings. The objective of resolution is to preserve financial stability, including ensuring the continuation of essential operations of financial undertakings and avoiding significant negative impacts on the financial system. Furthermore, the aim of the law is to minimize the risk of having to provide special public financial support to financial institutions, as well as to protect depositors, investors and the assets of their customers.