04 June 2008

New Rules on Foreign Exchange Balance

Today the Central Bank of Iceland issued some modifications of its prudential rules on the foreign exchange balance of financial institutions, which will take effect on July 1, 2008.

The principal change from previous rules is that the mismatch between financial institutions' foreign currency assets and liabilities shall not exceed 10% of own funds at any given time, whereas the permissible mismatch was 30% according to the previous rules. The lower mismatch percentage allowed under the new rules is intended to reduce risk and promote more effective currency price formation in the interbank market.

As under previous rules, the Central Bank of Iceland can permit financial institutions to maintain a special positive foreign exchange balance apart from their general foreign exchange balance in order to hedge against potential negative effects on their own funds as a result of changes in the exchange rate of the króna. Iceland’s largest commercial banks, which have extensive overseas operations, have such an authorisation from the Central Bank.

Further information can be obtained from Eiríkur Gudnason, Governor of the Central Bank of Iceland, at tel +354 569-9600.

No. 18/2008
June 4, 2008