Statement of the Financial Stability Committee of the Central Bank of Iceland. December 2024
The Icelandic financial system is resilient. The systemically important banks’ capital and liquidity are strong, and they have ready access to market-based funding. High real interest rates, together with weaker growth in economic activity, could create challenges for the financial system in the coming term. Furthermore, elevated geopolitical risk could have unforeseen implications. As yet, there are few signs of arrears or financial distress among households and businesses.
The Financial Stability Committee (FSN) has completed its annual review of systemically important financial institutions and has confirmed the systemic importance of Arion Bank, Íslandsbanki, and Landsbankinn.
The FSN has also completed its regular review of the systemic risk buffer and the capital buffer for systemic importance financial institutions (O-SII buffer).
The Committee decided to lower the systemic risk buffer rate from 3% to 2%, on the grounds that it considers systemic risk to have subsided since the buffer was first introduced in 2016. The financial system has grown more resilient in recent years, as can be seen in reduced volatility of key economic variables despite various shocks. Furthermore, new macroprudential tools have proven their value, and the financial stability framework is sturdier than before.
In addition, the FSN decided to increase the capital buffer for systemic important financial institutions (O-SII buffer) from 2% to 3%. This increase aims to capture the risk facing the economy because of the size and scope of the systemically important financial institutions.
The reduction of the systemic risk buffer and the increase in the O-SII buffer result in a virtually unchanged overall capital requirement on the three systemically important banks. For smaller deposit institutions not considered systemically important, however, the capital requirement is reduced.
Moreover, the FSN approved and published a policy document outlining the criteria for the determination of the countercyclical capital buffer (CCyB). According to the policy, the CCyB will generally range between 2% and 2.5% of the domestic risk base. In setting a positive neutral CCyB, the Committee is following the precedent set by a number of other European countries. The Committee also decided, following its quarterly review, to keep the CCyB unchanged at 2.5%. The FSN reiterates the importance for financial institutions of maintaining a strong capital position to ensure resilience in times of stress.
The Committee underscores the importance of continued efforts to enhance operational security in payment intermediation. Positive steps have been taken towards an independent domestic payment solution, and the FSN expects implementation to begin in 2025.
As before, the Committee will apply the policy instruments at its disposal to preserve financial stability, thereby enabling the financial system to mediate credit and payments and redistribute risks appropriately.
Press release no. 20/2024
4 December 2024
Enclosed:
1. Criteria for the determination of the countercyclical capital buffer.
2. Memorandum – background to the decision on the countercyclical capital buffer.
a. Excel-file with figures in the memorandum.
3. Memorandum - background to the decision on the systemic risk buffer.