Framework legislation on financial stability needs to be adopted to enhance and preserve an efficient and effective financial system in Iceland for the public good. Similarly, a Financial Stability Council needs to be established and the implementation of legislation on the financial sector, the Central Bank and the Financial Supervisory Authority placed under a single ministry, to reinforce governance and clarify the responsibility for financial stability. These are among the proposals from the expert Group of Three which has examined the overall statutory and framework of the Icelandic financial system.
The Group of Three, which was appointed last March by the Minister of Economic Affairs, has delivered its proposals and suggestions to Minister of Finance, Katrín Júlíusdóttir, and Minister of Industries and Innovation, Steingrímur J. Sigfússon. Details of the proposals and the underlying analysis are presented in the Group's report, Framework for Financial Stability in Iceland. The members of the Group are Gavin Bingham, former Secretary General of the Central Bank Governance Forum of the Bank for International Settlements (BIS) in Basel, Jón Sigurðsson, former President and CEO of the Nordic Investment Bank (NIB) in Helsinki, and Kaarlo Jännäri, former Director General of the Finnish Financial Supervisory Authority.
At a press conference held today to present the Group's report, the two Ministers announced that work will commence immediately on implementing its proposals. The intention is to submit two Bills, putting the proposals into effect, to the current legislative session of the Althingi.
The proposals of the Group of Three include a variety of measures to deal with the systemic problems of concentration, complexity, lax competition and distorted incentives in the Icelandic financial system. It is proposed, for instance, that all financial undertakings be subject to a common core set of rules on comparable activities. It is also proposed that different critical functions, such as investment banking and commercial banking, be made separable in resolution, and careful consideration will be given as to whether legal separation should be required of certain particularly risky financial activities from deposit-taking activities of banks, if such activities comprise a significant share of a bank's business. The report suggests that regulatory powers and control rights arising from public ownership be used to address distorted incentives, e.g. by requiring variable compensation for key employees and managers to be paid in the form of non-voting equity or non-negotiable junior subordinated instruments.
The Minster of Finance and Economic Affairs will appoint a committee to draft a Bill on financial stability and the Minister of Industries and Innovation will appoint a committee to draft a Bill on crisis management, intervention and resolution of financial undertakings.
It should also be pointed out that preparation is underway in the Ministry of Industries and Innovation on a new Bill on a Deposit Guarantee Scheme based on a forthcoming EU Directive, which will replace the blanket state guarantee of deposits in Icelandic banks, in force since October 2008.