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Ministry of Finance and Economic Affairs

Minutes of the Meeting of the Financial Stability Council of 2 October 2015

Minutes of the Meeting of the Financial Stability Council, 2 October 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: Guðmundur Árnason, Permanent Secretary of the Ministry of Finance and Economic Affairs; Anna Borgþórsdóttir Olsen, Acting Director General of the Department of Economic Affairs and Financial Services at the Ministry of Finance and Economic Affairs; Harpa Jónsdóttir, Assistant 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 1:35 pm.

1. Report from the Systemic Risk Board

The Chairman of the Systemic Risk Board presented its report to the Financial Stability Council and discussed risk in the financial system and how it has changed since the Council's last meeting this spring. In the short term there is little change, but viewed over a somewhat longer period risk to the financial system has grown with the increasing probability of macroeconomic imbalances. The banks' resilience to shocks is considered to be good, as both their capital ratios and liquidity are high. While the large banks reported substantial first-half profits, these can be attributed to a considerable extent to one-off items. Settlements of the estates of the failed banks and currency auctions for offshore ISK could have some negative effects on the banks' liquidity, but this should be within acceptable limits. The preparation of prudential rules in connection with risk arising from cross-border capital movements must be completed, as the relaxing of currency controls is approaching.

2. Capital buffers

There was discussion of the statutory authorisations held by the Financial Supervisory Authority to set capital buffers for financial undertakings which take effect at year-end, cf. Act No. 161/2002. This included a review of conditions under which buffers should be imposed and how these conditions should be assessed. Information disclosure obligations towards markets and European supervisory authorities were discussed, as well as how capital buffers were treated in neighbouring countries.

3. Confirmation of systemically important actors

The Systemic Risk Board requested that the Financial Stability Council confirm its definition of systemically important infrastructure, cf. subparagraph d of the second paragraph of Art. 4 of Act No. 66/2014, on a Financial Stability Council. It was proposed that three systems be considered systemically important infrastructure, i.e. the real-time gross settlement (RTGS) of the Central Bank of Iceland, the netting system of Greiðsluveitan ehf. and the clearing system of the securities depository NASDAQ verðbréfamiðstöð hf. The proposal is based on the scope of activities and significance of these three systems for Icelandic financial market infrastructure and on international guidelines which apply to them, Principles for Financial Market Infrastructure (PFMI). The Financial Stability Council confirmed that the above-mentioned three systems would be defined as systemically important infrastructure.

4. Lending to households and corporates

A review was made of analyses of household and corporate debt. A decrease in household debt is clearly visible – LTV ratios have improved, debt arrears have declined and overall household debt ratios are good by international comparison. Net assets of individuals by age-group have grown for most groups, primarily as a result of the government's debt-reduction actions. Corporate debt relative to GDP has generally been decreasing, but net new lending has grown steadily since Q3 of last year. Corporate arrears have followed a similar trend as individual arrears.

5. Capital flows

The Central Bank Governor discussed the flows of foreign capital to Iceland since this summer and how the bank has responded to this. He also gave an account of the work underway to follow up on the bank's recommendations in its report Prudential Rules Following Capital Controls, on measures to influence capital flows into and out of Iceland.

6. Other matters

The news announcement was approved with amendments.

Meeting adjourned at 2:50 pm.

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