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Ministry of Finance and Economic Affairs

Draft legislation on Financial Stability Council

Draft legislation on the establishment of a Financial Stability Council has been submitted for review on the Ministry of Finance and Economic Affairs‘ website. The draft legislation was prepared by a committee appointed by the Minister in December 2012.

The committee was composed of Tryggvi Pálsson, economist and chairman, Haraldur Steinþórsson, legal adviser to the Ministry of Finance and Economic Affairs, Kjartan Gunnarsson, deputy permanent secretary with the Ministry of Industries and Innovation, Guðrún F. Þórðardóttir, deputy chief legal counsel with the Financial Supervisory Authority, and Jón Þ. Sigurgeirsson, director with the Central Bank of Iceland. Their alternates were Lilja Sturludóttir, legal adviser to the Ministry of Finance and Economic Affairs, Valgerður Rún Benediktsdóttir, director general with the Ministry of Industries and Innovation, Ragnar Hafliðason, senior advisor to the Director General of the Financial Supervisory Authority, and Sigríður Logadóttir, general counsel of the Central Bank of Iceland. The committee‘s secretary was Steindór G. Jónsson, specialist with the Ministry of Finance and Economic Affairs.

The committee was tasked with preparing proposals on the establishment of a Financial Stability Council on the basis of the current institutional setting, i.e. with the participation of the Ministry of Finance and Economic Affairs, the Ministry of Industries and Innovation, the Central Bank of Iceland and the Financial Supervisory Authority. The aim was to secure synergy in microprudential and macroprudential supervision.

The objective of the draft legislation is to promote and preserve financial stability in the public interest by giving a special council, the Financial Stability Council, certain tasks and authorisations in accordance with European and other international practice, recommendations in recent reports on the financial system, the framework for financial stability in Iceland and Icelandic legislative practices.
Parallel to the aforementioned committee's work, committees formed by the Minister of Industries and Innovation are preparing draft legislation regarding financial stability, which may affect the draft legislation submitted here for review. This pertains to the implementation of the European capital requirements directive (CRD IV/CCR), draft legislation on household mortgage loans, also based on European regulations, and draft legislation on defined components of the Act on Financial Undertakings, i.e. resolution, capital requirements, interbank transactions and the interplay of resolution processes and deposit guarantees. That committee is also tasked with considering the possible separation of commercial and investment banking.

The main changes and new provisions of the draft legislation are as follows:

  • The Financial Stability Council will be a platform for consultation, exchange of information and policy-making on financial stability and the coordination of responses in the event of a financial crisis. The Council can initiate public debate, issue opinions or direct recommendations, but without prejudice for the competence of the institutions currently tasked with promoting and preserving financial stability.
  • Systemic risk analysis and the authorities‘ response to turbulence in financial markets or threats to financial stability will be based on clear legal provisions and be an improvement from the current setting, which is based on the operations of the Committee on Financial Stability and the cooperation agreement between the Central Bank of Iceland and the Financial Supervisory Authority.
  • Legal provisions on the role and distribution of responsibilities between institutions will be clear. Objectives, instruments and responsibilities should be interconnected so that the institution that decides on the use of instruments is also responsible for the objective at hand to be reached.
  • The Minister responsible for economic policy will chair the Council. The Central Bank of Iceland will chair the Council‘s systemic risk committee. The Financial Supervisory Authority promotes financial stability in its operations.
  • The Financial Stability Council is composed of the Minister responsible for the Treasury and budget policy (chairman), the Minister responsible for financial markets, the Governor of the Central Bank and the Director General of the Financial Supervisory Authority.
  • A systemic risk committee operates under the Financial Stability Council, composed of the Governor of the Central Bank (chairman), the Director General of the Financial Supervisory Authority, the Deputy Governor of the Central Bank and one member nominated by the Director General. Permanent Secretaries of the Ministries or officials nominated by them from the Ministries responsible for the Treasury, budget policy and financial markets will be members without a vote. The committee utilises the joint analysis of systemic risk by the Central Bank and the Financial Supervisory Authority, coordinates the application of instruments available to the two institutions pertaining to financial stability, and submits recommendations to the Financial Stability Council on the actions of other authorities. The operations of the systemic risk committee will be based in the Central Bank.
  • Transparency will be increased, towards the Althingi and the public.

The committee reached a consensus on the importance of establishing a Financial Stability Council. The Central Bank of Iceland and the Financial Supervisory Authority have yet to form a position on the final draft legislation.

Those who wish to submit comments on the draft legislation can do so by sending an e-mail to [email protected] with the words "Financial Stability Council 2013" as the subject. It is also possible to submit comments by regular mail.

The last day to submit comments is Monday 26 August 2013. The draft legislation is scheduled to be submitted to the Althingi in the autumn of 2013.

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