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Ministry of Finance and Economic Affairs

Minutes of the Meeting of the Financial Stability Council of 14 April 2015

Minutes of the Meeting of the Financial Stability Council, 14 April 2015.

The meeting was held in the Ministry of Finance and Economic Affairs.

Members of the Council: Minister of Finance and Economic Affairs Bjarni Benediktsson, Chairman; Már Guðmundsson, Governor of the Central Bank; Unnur Gunnarsdóttir, Director General of the Financial Supervisory Authority

Others attending: Tómas Brynjólfsson, Director General of the Department of Economic Affairs and Financial Services at the Ministry of Finance and Economic Affairs; Guðmundur Árnason, Permanent Secretary in the Ministry of Finance and Economic Affairs; Sigríður Benediktsdóttir, Director of Financial Stability at the Central Bank; Jón Þór Sturluson, Deputy Director General of the Financial Supervisory Authority; and Tinna Finnbogadóttir, secretary of the Financial Stability Council.

The meeting commenced at 1:10 pm.

1. Arrangements regarding minutes

The arrangements for taking minutes and having them approved were discussed, cf. provisions in the Council's protocols.

2. Report from the Systemic Risk Board

The Chairman of the Systemic Risk Board presented its report to the Financial Stability Council. Risk in the financial system is for the most part unchanged since the last meeting of the Systemic Risk Board. Current economic conditions are favourable,, with the exception of the capital account, which is restricted by capital controls. Despite the positive external environment for financial stability, some risk factors exist to which attention should be paid, both in the short and long term. Short-term risk is connected with the planned relaxation of capital controls while in the longer term continuing capital controls could also involve risk. Despite high profits and a strong capital position, the banks' core operations are relatively weak, which could in the longer term put pressure on their balance sheets. Discussion.

3. Loan-to-value (LTV) and debt service-to-income (DSTI) ratios

There was discussion of LTV and DSTI ratios and their use as macroprudential tools. The Financial Supervisory Authority is to be authorised to issue regulations on these ratios in a new Bill of Legislation on consumer housing mortgages, which is to be submitted to the Icelandic parliament Althingi later this year. The rules would be adopted after receiving recommendations from the Financial Stability Council.

4. Risk indicators for intermediate objectives

The first interim objective for financial stability is: "to mitigate and prevent excessive credit growth, leverage and asset market imbalances", according to the official policy on financial stability. The Financial Stability Council confirms three core indicators for this intermediate objective: 1) developments in lending relative to GDP; 2) real growth in lending to households and corporates; and 3) real increase in residential and commercial real estate prices.

5. Systemically important regulated entities

A definition of systemically important regulated entities was submitted for approval. It was prepared by the Systemic Risk Board based on the methodology presented at the last meeting. It was then proposed that Arion Bank hf., Landsbankinn hf., Íslandsbanki hf. and the Housing Financing Fund be designated systemically important regulated entities. The Financial Stability Council confirmed the methodology applied in this assessment and that these four parties should be considered systemically important.

6. Other matters

a. Amendment to official policy on financial stability

Changes in the wording were proposed to amend the official policy on financial stability. Approved.

b. News announcement

Approved with amendments

Meeting adjourned at 2:55 pm.

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