New Central Bank rules on credit institutions’ liquidity ratios
New Rules on Credit Institutions’ Liquidity Ratios, no. 1520/2022, took effect on 1 January 2023. At that time, the previous Rules no. 266/2017 on the same topic expired.
The new Rules introduce an 80% minimum liquidity ratio in euros for credit institutions whose euro-denominated liabilities equal 10% or more of their total liabilities. Concurrent with the introduction of the new requirements for liquidity ratios in euros, the 100% liquidity ratio requirement for all foreign currencies combined has been abolished. The minimum 100% liquidity requirement for all currencies combined remains in effect under the new Rules, in accordance with Regulation (EU) 2015/61. In addition, credit institutions are still required to satisfy at least 50% of their liquidity requirement in Icelandic krónur.
Regulation (EU) 2015/61 contains an authorisation to set liquidity requirements for individual currencies that reach a specified threshold; i.e., currencies for which liabilities equal or exceed 5% of the total liabilities of the credit institution concerned. As is noted above, the new Rules introduce an 80% minimum liquidity ratio in euros for credit institutions whose euro-denominated liabilities equal 10% or more of their total liabilities. The aim of setting separate liquidity requirements for specified foreign currencies is to mitigate credit institutions’ liquidity risk by ensuring that they always have enough liquid assets in the specified currencies to satisfy their obligations in those currencies under stressed conditions over a specified period of time. It is appropriate to require that credit institutions generally have liquidity to offset liabilities if total liabilities in a given currency exceed a certain percentage of their total liabilities. At this point in time, it is suitable to require that credit institutions have liquidity buffers in those currencies to offset a sizeable proportion of their total liabilities. In this context, it is considered sufficient to set the threshold for liabilities in such currencies at 10% of the credit institution’s total liabilities. For Icelandic credit institutions, it is primarily the euro that reaches this threshold.
In setting a suitable liquidity ratio for euros, consideration is given to the importance of giving credit institutions the flexibility to determine the composition of their liquid assets in accordance with the market conditions prevailing at the time in question. Markets that use euros are accessible and active, and in general, it should be possible to acquire high-quality liquid assets denominated in euros at relatively short notice.
It is worth stressing, however, that credit institutions must continue to satisfy the requirements on consistency in currency composition for all currencies exceeding the 5% threshold; cf. Article 8, Paragraph 6 of the aforementioned Regulation (EU) 2015/61.The text of Rules 1520/2022 can be found here: Rules no. 1520/2022 on the website of the Law and Ministerial Gazette [Stjórnartíðindi]