16 October 2008

Status of domestic and international payment intermediation

Domestic payment intermediation between banking institutions and their customers is proceeding smoothly. The same is true of Icelandic credit card use, both domestically and abroad. When paying for foreign currency, however, cardholders must heed the exchange rate, as they always have.

At the beginning of October, the Central Bank of Iceland provided temporary support for the current contractual relationship between banks and savings banks that issue payment cards, on the one hand, and the entities that carry out settlement of card transactions, on the other. This was done in order to guarantee smooth card transactions during the current circumstances. In the Bank’s estimation, it was unavoidable at that time to lower high, unused credit limits so as to reduce risk. In the vast majority of cases, this action should have posed no problem.

Although domestic payment intermediation is proceeding normally, the same cannot be said of payments to and from Iceland. In some instances, foreign banks that are parties to payment transactions do not execute normal and appropriate orders for payment to Icelandic banks for fear that such transactions will end in a moratorium on payment on the receiving end, or for fear that the funds involved will not be transferred to the appropriate party, leaving the foreign bank liable for the error. Recipients are experiencing difficulties in making timely payment on their obligations because of this. There have been problems with payments to and from all countries; however, the situation is by far most difficult vis-à-vis British counterparties, which is directly attributable to the extremely harmful actions taken by the British authorities.

The Central Bank of Iceland has adopted a temporary method for international payment intermediation. This method involves routing banking institutions' payments to and from Iceland through the Central Bank's own accounts with foreign counterparts, which generally have no involvement with the operations of Icelandic banks.

If any foreign parties are uncertain whether their payments are being routed to the proper parties, or if they fear that they will be held liable for non-delivery of such payments, the Central Bank of Iceland has declared to foreign credit institutions that it will guarantee that all payments routed through the Central Bank's accounts to the accounts of Icelandic credit institutions will be delivered to the credit institutions concerned, for the benefit of the relevant account holders in those institutions.

The Central Bank will ensure that payments are received by the appropriate domestic parties with the assistance of domestic banks or savings banks. This method has proven successful in transactions with Denmark, and it is hoped that transactions with other countries will prove equally successful very soon.

The difficulties accompanying payments to and from Iceland are attributable to conditions in Iceland and in other countries. The launch of Iceland’s new banks will make it possible to solve the problems that have arisen more quickly. It is necessary that the new arrangements for Kaupthing Bank’s operations be clarified as soon as possible.