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Ministry of Finance and Economic Affairs

Minutes of the meeting of the Financial Stability Council on 26 September 2019

Meeting held at the Ministry of Finance and Economic Affairs

In attendance were: Bjarni Benediktsson, Minister of Finance and Economic Affairs, chairman; Ásgeir Jónsson, Governor of the Central Bank of Iceland; Unnur Gunnarsdóttir, Director General of the Financial Supervisory Authority; Guðrún Þorleifsdóttir, Director General, Department of Financial Services, Ministry of Finance and Economic Affairs; Eggert Þröstur Þórarinsson, Acting Director, Financial Stability Department, Central Bank of Iceland; Bryndís Ásbjarnardóttir, Head of Macroprudential Risk at the Financial Supervisory Authority; and Tinna Finnbogadóttir, Secretary to the Financial Stability Council.

The meeting was called to order at 13:10 hrs. on 26 September 2019

1. Presentation by chair of the Systemic Risk Committee on key aspects of the Committee’s report
a. Lower inflation and inflation expectations were among the topics discussed. A contraction is foreseeable in the economy in 2019 while forecasts for next year are somewhat optimistic. It is likely, however, that upcoming forecasts will be less so. There is still considerable uncertainty in foreign markets which has resulted in lower interest rates, especially long-term rates. Despite this uncertainty, the Icelandic banks have relatively low credit risk spreads and are very well financed in foreign currencies. Their resilience is still considerable, but their liquidity, especially in ISK, could be better. Pension fund lending activities were discussed, both real estate loans and corporate loans.
2. A discussion paper on a loan-to-income ratio and a warning from the ESRB on vulnerabilities in the Icelandic residential real estate market
a. The Head of Macroprudential Risk at the Financial Supervisory Authority presented the main points in the European Systemic Risk Board's (ESRB) warning of weaknesses in the residential real estate market in Iceland and discussed key elements of the Icelandic housing market. Iceland was invited to respond to the warning, and the response was published concurrently with the warning in the Official Journal of the European Union on 23 September 2019. Based on its analysis of the housing market in Iceland, the ESRB suggested that Icelandic authorities consider a maximum loan-to-income ratio (LTI). The Financial Supervisory Authority intends to issue a consultation document calling for views on the warning, the risks associated with the real estate market and on limits on the debt ratio.
3. A quarterly decision on the countercyclical capital buffer
a. The Council approved a recommendation to the Financial Supervisory Authority to keep the countercyclical capital buffer unchanged.
4. Other business.
a. Iceland is a member of the Financial Action Task Force (FATF). In 2018, FATF published a Mutual Evaluation Report of Iceland’s compliance with criteria on measures against money laundering and terrorist financing. The report showed that Iceland had many opportunities to increase compliance to FATF’s ratings on effectiveness and technical matters. Since the completion of FATF’s initial assessment, the Government of Iceland has undertaken a thorough revision of its legal framework in this field and strengthened key institutions. An FATF designation of Iceland, based on its progress in meeting the requirements laid out in 2018, is expected in late October of this year.
b. Approval of press release

The meeting was adjourned at 14:30 hrs.

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