Rules on Credit Institutions’ Minimum Net Stable Funding Ratio
The Central Bank of Iceland’s Rules on Credit Institutions’ Minimum Net Stable Funding Ratio, no. 750/2021, took effect today. The Rules introduce a 100% overall stable funding ratio. At the same time, the Rules on Funding Ratios in Foreign Currencies, no. 1032/2014, were repealed.
With amendments to the Regulation on Prudential Requirements for Credit Institutions, no. 233/2017, contained in Rules no. 749/2021, which also took effect today, Regulation (EU) 2019/876 of the European Parliament and of the Council (CRR II) has been implemented. Among other things, CRR II introduces binding minimum net stable funding ratios for credit institutions. In accordance with Article 83, Paragraph 4 of the Act on Financial Undertakings, no. 161/2002, the Central Bank of Iceland sets rules on stable funding, wherein it is permissible to stipulate minimum net stable funding ratios in Icelandic krónur and in foreign currencies. The Central Bank Rules on Credit Institutions’ Minimum Net Stable Funding Ratio, no. 750/2021, are based on CRR II provisions pertaining to net stable funding requirements.
The Rules on Net Stable Funding Ratios aim to restrict maturity mismatches between credit institutions’ assets and liabilities and limit the extent to which credit institutions rely on unstable short-term funding to finance long-term assets. The scope of the Rules covers all credit institutions and not merely commercial banks, as was the case with the previous Rules no. 1032/2014. According to the Rules, credit institutions must submit reports and maintain a 100% stable funding ratio in all currencies combined, and they shall monitor ratios in significant currencies; i.e., individual currencies in which total obligations equal or exceed 5% of the institution’s total liabilities. Furthermore, according to the Rules, credit institutions are under a general obligation to ensure that the currency composition of their funding is aligned with the currency composition of their assets. The Rules also authorise the Central Bank to require that credit institutions minimise their currency mismatches by restricting the proportion of required stable funding in specified currencies that may be met with available stable funding in other currencies. Such restrictions apply only to the reporting currency or to significant currencies, and they may imposed with regulatory amendments or through the supervisory review and evaluation process (SREP).