In January 2022, the Central Bank of Iceland opened a liquidity window for deposit taking institutions in case they experienced an unexpected, temporary need for short-term liquidity. In reviewing its policy instruments, the Bank has now decided to expand this liquidity facility, enabling these institutions to use it to cover temporary fluctuations in their liquidity ratios.
The changes will take effect on 7 July 2025. The main changes are that counterparties holding term deposits with the Central Bank will no longer be ineligible for the facility, the liquidity window now extends to all credit institutes and the facility will not be subject to a maximum amount. Counterparties may apply for the 14-day collateralised loan on any Central Bank business day, upon providing collateral from the Bank’s list of eligible collateral. After 14 days, a new application must be submitted for a renewal of the loan.
It should be noted that this liquidity facility is not intended to finance lending activity or other allocation of funds on the assets side of financial institutions’ balance sheets. As such, it is conceived not as a monetary policy measure but as a means of enabling credit institutions to respond to temporary fluctuations in their liquidity ratio.
According to the Central Bank’s Rules on Credit Institutions’ Liquidity Ratios, credit institutions’ liquid assets must equal at least the following percentages of net liquid outflows over the next 30 days: 100% for all currencies combined, 80% for euros, and 50% for Icelandic krónur. Credit institutions’ liquidity position is currently well above the Central Bank’s required minimum, and their liquid assets consist mainly of Treasury bonds and deposits with the Central Bank. A situation could arise, however, in which a credit institution’s high-quality liquid assets are insufficient to cover a temporary decline in its liquidity ratio. The liquidity window is intended, among other things, to address such circumstances. It should be noted that because the Central Bank is a counterparty to the liquidity facility, the amount of the transactions in question is not included in estimated outflows of liquid assets over the next 30 days.
The liquidity facility will bear interest at a rate 0.5 percentage points above the Bank’s seven-day collateralised lending rate and 1.25 percentage points above the Bank’s key interest rate. On 7 July 2025, the 14-day facility will therefore bear 8.75% interest. Further information on this liquidity facility can be found in the terms and conditions, which will be published on the Bank’s website together with the list of eligible collateral. At the same time, the Rules on Central Bank of Iceland Facilities for Financial Undertakings will be amended and posted on the website of the Law and Ministerial Gazette [Stjórnartíðindi].
Press release no. 11/2025
30 June 2025