Meeting of the Financial Stability Council, held at the Ministry of Finance and Economic Affairs, 6 April 2017
Council members: Benedikt Jóhannesson, Minister of Finance and Economic Affairs, Chair of the Council; Már Guðmundsson, Governor of the Central Bank; Unnur Gunnarsdóttir, Director General of the Financial Supervisory Authority.
Other attendees: Guðrún Þorleifsdóttir, Director General of the Department of Economic Affairs and Financial Services at the Ministry of Finance and Economic Affairs; Harpa Jónsdóttir, Director of the Financial Stability Department at the Central Bank; Jón Þór Sturluson, Deputy Director General of the Financial Supervisory Authority; Bryndís Ásbjarnardóttir, Head of Head of Macroprudential Supervision at the Financial Supervisory Authority; and Tinna Finnbogadóttir, secretary of the Financial Stability Council.
Meeting called to order at 13:00 hrs.
1. Systemic Risk Committee report
The Chair of the Systemic Risk Committee identified the key risks in the financial system at present. Particular attention was directed at the tension in the economy and potential interactions with the financial system, the growth and financing of the tourism industry, and the tension in the real estate market. Households' and businesses' position was generally strong, however. A new environment was at hand following the liberalisation of capital controls, as the domestic economy would in all likelihood be more vulnerable than before to developments in foreign financial markets. Financial institutions' increased access to foreign credit markets could tempt them to grant foreign-denominated loans to domestic borrowers, particularly those without protection against the associated risk.
The three commercial banks' dividend payments were discussed, as was the associated impact on the banks' capital and liquidity. It emerged that the Financial Supervisory Authority would discuss the matter with the banks if dividend payments were higher than policies indicated. The banks' capital requirements are risk-based, and if stress tests warrant it, the Financial Supervisory Authority would insist on increased reserves.
2. Assessment of risk relating to intermediate objective 1
The head of the Financial Supervisory Authority's Macroprudential Supervision reviewed the risk relating to intermediate objective 1; i.e., working to combat excessive credit growth, indebtedness, and asset market imbalances. Consideration was given to private sector credit growth, the housing cycle and its potential impact on loan losses, rising real estate prices and the housing shortage, the banks' funding and resilience, and the financial cycle position and the estimated probability of a financial shock. Also discussed were the macroprudential tools mentioned in the EU Systemic Risk Board recommendations and intended for use, as needed, in response to risks relating to intermediate objective 1. These tools are: countercyclical capital buffers, loan-to-value ratios, debt-service to income and debt to income ratios. The Financial Supervisory Authority was granted the authority to use the aforementioned ratios 1 April 2017, with the passage of the Act on Mortgage Lending to Consumers, no. 118/2016.
There was a general discussion of the methodology used to assess systemic risk and international experience of it. There was also a discussion of the changes that have been made since the financial collapse of 2008 in reporting to supervisory bodies and in international financial reporting standards, which are intended to expose risk more effectively, as well as changes in the risk management of the banks themselves in recent years, in part because of the Financial Supervisory Authority's survey and assessment process.
The Council discussed the impact of prudential requirements on the competition between the banks and the pension funds, and of the differing nature of their activities.
3. Quarterly decision on the countercyclical capital buffer
The Systemic Risk Committee's recommendation that the countercyclical capital buffer be held unchanged from the last meeting, at 1.25%, was approved. For the first time, it was decided to send the Financial Supervisory Authority a recommendation that the countercyclical capital buffer be held unchanged. It was also decided to notify the Authority in this way in the future when the buffer was kept unchanged.
4. Confirmation of systemically important regulated entities and capital buffers on systemically important financial institutions
It was confirmed that Arion Bank hf., Íslandsbanki hf., Landsbankinn hf., and the Housing Financing Fund should continue to be defined as systemically important regulated entities. It was agreed to keep the capital buffer on systemically important financial institutions unchanged at 2%. The requirement will apply only to the three commercial banks, as the provisions on capital buffers in the Act on Financial Undertakings do not apply to the Housing Financing Fund.
5. Adoption of EU Regulation no. 575/2013, Article 501.
The Council reviewed the impact of the deduction from capital requirements that financial institutions will receive in connection with lending to small and medium-sized enterprises (SME) upon the adoption of EU Regulation no. 575/2013. It can be expected that the impact will be proportionally greater in Iceland than in other EEA member countries, as almost all firms in Iceland fall under the SME category as defined by the EU. Other things being equal, the adoption of Article 501 of the Regulation will lead to a reduction of about 1% in the three commercial banks' capital requirements, although this will differ from one bank to another.
6. Other business
Press release approved with amendments.
The meeting was adjourned at 14:40 hrs.