The Financial Stability Council held its fourth meeting in 2019 on Tuesday, December 17. This was the last meeting of the Financial Stability Council in its current form as, from the 1st of January 2020, the regular tasks and the role of the Financial Stability Council will change with the merger of the Central Bank of Iceland and the Financial Supervisory Authority. The Financial Stability Council will nevertheless remain an important forum for consultation and information exchange between the Minister of Finance and Economic Affairs and the Central Bank of Iceland on financial stability.
Cyclical systemic risk has remained fairly stable since the last meeting. However, the gray listing by FATF (e. Financial Action Task Force) and negative publicity surrounding a domestic seafood company abroad have increased the reputation risk of Iceland. The economy has slowed down and a contraction in the tourism industry has become more tangible. At the same time, real estate prices have remained stable and credit growth has slowed, especially lending to firms. The global economic outlook has deteriorated since the last meeting of the council.
The commercial banks’ resilience remains considerable. Their capital ratios are somewhat above the total capital requirement. Liquidity ratios are also amply above the regulatory requirement and the banks’ liquidity position in the domestic currency has strengthened since the last meeting of the council. The economy is well prepared to face any adverse shocks in the wake of the economic expansion of the last several years. The external position of the economy is positive and public and private debt are historically low. Both monetary and fiscal policy have room to respond to adverse developments and the Central bank’s foreign exchange reserves are ample.
Notice is made of a previous announcement from the Financial Supervisory Authority on May 15 2018 stating that the systemic risk buffer for banks and savings banks, which are not systemically important, will be raised from 2% to 3% on January 1 2020 and the buffer will then be the same for all banks and savings banks.
The Council approved a recommendation to the Financial Supervisory Authority on maintaining the countercyclical buffer at previously recommended levels. Based on the Systemic Risk Committee’s analysis, the build-up of cyclical systemic risk has slowed. As cyclical systemic risk has not receded nor been realized, there is little to support a release of the buffer. In accordance with the Financial Supervisory Authority’s decision from February 2019, the applicable countercyclical buffer rate will be raised from 1.75% to 2% in February 2020.