Financial Stability Council
The Financial Stability Council is a formal co-operation forum of public authorities for financial stability. The Council serves as venue for consultation, exchange of information and policy formulation on financial stability, and co-ordinates the preparedness of public authorities for financial crises.
The principal tasks of the Financial Stability Council are the following:
- to formulate official policy on financial stability;
- to assess economic imbalances, financial system risks, undesireable incentives and other conditions that are likely to jeopardise financial stability;
- to define the measures, other than the application of the Central Bank's monetary policy instruments, that are considered necessary at any given time in order to affect the financial system with the aim of strengthening and preserving financial stability;
- to confirm definitions of systemically important supervised entities, infrastructure, and markets whose activities could impact financial stability.
Apart from its regular meetings, the Council shall convene as an official forum for consultation when a financial crisis is deemed imminent or has struck, or when there is the risk of events that could cause significant contagion.
The Financial Stability Council is comprised of the Minister of Finance and Economic Affairs, who acts as chairman, the Governor of the Central Bank and the Director General of the Financial Supervisory Authority (FME).
According to Act No.66/2014, on a Financial Stability Council, a Systemic Risk Committee works for the Council to evaluate the current situation and outlook in the financial system, systemic risk, and financial stability. The committee meets at least four times a year. It consists of the Governor of the Central Bank, who acts as chairman, the Director General of FME, the Deputy Governor of the Central Bank, the Deputy Director General of FME and an expert appointed by the Minister for a five-year term. The economist Björn Rúnar Guðmundsson was appointed by the Minister in 2014. The Systemic Risk Board adopts its own rules of procedure, which are approved by the Financial Stability Council.
Instruments available to the Financial Stability Council
Recommendations of the Financial Stability Council are provided for in Act No. 66/2014, on a Financial Stability Council, and Act No. 161/2002, on Financial Undertakings.
Under the Act on a Financial Stability Council, if circumstances arise that are likely to jeopardise financial stability or have an adverse impact on the financial system, the Council can make recommendations to the relevant authorities for measures in response. These recommendations shall be made public and substantiated unless their disclosure is regarded as liable to have a negative impact on financial stability. The Act on Financial Undertakings., No. 161/2002, provides for the Financial Stability Council to send recommendations on capital buffers to FME, cf. subparagraphs b-d of Art. 86.
The Financial Stability Council is also expected to give an opinion on rules for maximum loan-to-value (LTV) ratios for housing mortgages, cf. Art. 25 of Act No. 118/2016, on Consumer Mortgages, and rules on the maximum total amount of real estate mortgages or their payment service in proportion to the consumer’s income, cf. Art. 27 of the same Act.
Intermediate financial stability targets
In their analyses, the Systemic Risk Committee and Financial Stability Council consider six intermediate targets that together contribute to financial stability. These intermediate targets are based on the intermediate objectives of the European Systemic Risk Board, as well as aspects reflecting the situation in Iceland. At the meetings of the Financial Stability Council, the risks related to the intermediate targets are reviewed, for instance, by examining various economic indicators. The Financial Stability Council has adopted four core indicators for intermediate target 1 and three core indicators for intermediate target 2. Indicators for other targets have not been formally approved by the Council. Risks affecting intermediate targets can be addressed and mitigated by various instruments, some of which the Financial Stability Council can make recommendations on and others which it does not.
|Intermediate target||Example of indicator||Example of instrument|
|1||To mitigate and prevent excessive credit growth, leverage and asset market imbalances|
|2||To mitigate and prevent excessive maturity mismatches and market illiquidity, especially in foreign currencies|
|3||To limit direct and indirect exposure due to concentration risk and cross-ownership links|
|4||To limit the systemic impact of misaligned incentives with the aim to reduce moral hazard, especially on institutions that are regarded as systemically important||Systemic importance of Icelandic financial undertakings based on their|
|5||To mitigate and prevent the adverse impact of excessive capital in- and outflowsthat can amplify business cycles|
|6||To enhance the resilience of financial infrastructure|
The Financial Stability Council can issue recommendations on three capital buffers, i.e. a buffer for systemically important financial undertakings, systemic risk buffer and counter-cyclical buffer. A fourth capital buffer, the capital conservation buffer, is applied to financial undertakings without the involvement of the Financial Stability Council, cf. Art. 86 e of the Act on Financial Undertakings. The counter-cyclical buffer is to be reviewed quarterly and the buffer for systemic importance annually.
The counter-cyclical buffer is currently 1.25%, the buffer for systemically important financial undertakings 2% and the systemic risk buffer 3%. In the first instance when a decision was taken to recommend the capital buffers, at the Council’s meeting on 22 January 2016, the recommendations were accompanied by the Council's explanations of the buffers and the methodology for their assessment as well as justification for the counter-cyclical buffer, buffer for systemically important financial undertakings and systemic risk buffer.
Recommendation of the Financial Stability Council on capital buffers
Capital buffers applied to financial undertakings
The table below shows the capital buffers which are combined to form a composite buffer, in accordance with the Act on Financial Undertakings, as of 15 May 2018 (The countercyclical buffer will be raised by 0,25% on 1 February 2020). The capital buffers are in addition to general capital adequacy requirements.
to systemic importance
capital buffer required
|Arion Bank hf.
|Kvika Bank hf. and savings banks**
* A capital conservation buffer is applied pursuant to Art. 86 e of Act No. 161/2002; the Financial Stability Council is not involved in its application.
** Savings banks Sparisjóður Austurlands, Höfðhverfinga, Strandamanna and Suður-Þingeyinga.
*** Will be 3% as of 1 January 2020.
**** Borgun hf., the Institute of Regional Development, Municipal Credit ohf., Lykill fjármögnun hf. and Valitor hf.
Opinions of the Financial Stability Council
Authorisation to set rules for maximum LTV ratios and maximum amounts for real estate mortgages or their debt service relative to consumer income was granted to FME under Act No. 118/2016, on Consumer Mortgages, after the Financial Stability Council had given its opinion. The authorisation entered into force on 1 April 2017 and such rules were first issued on 20 July 2017. The Financial Stability Council gave an opinion on those rules at its meeting on 20 June of the same year.
Systemically important financial institutions and infrastructure
The Financial Stability Council is to confirm the definitions of systemically important supervised entities, infrastructure, and markets whose activities could impact financial stability.
Systemically important supervised entities are those which, due to their size and the nature of their activities, can have a major negative impact on financial system stability and on the real economy if they end up in difficulties. For these reasons, and because systemically important supervised entities are generally important for the activities of the financial infrastructure as well as public access to payment services and own savings, the official security network which applies to them is more rigorous and direct and indirect guarantees of their obligations are more extensive. This magnifies moral hazard, which can emerge by these parties taking greater risks than is beneficial for the financial system as a whole. Therefore, there is a need for a regulatory framework that counteracts this tendency, especially in terms of increased capital adequacy and more active control.
The Financial Stability Council has confirmed that Arion Bank hf., Íslandsbanki hf. and Landsbankinn hf. are considered systemically important supervised entities.
The Real-time Gross Settlement system of the Central Bank of Iceland, the payment mediation system of Greiðsluveitan ehf. and the securities settlement system of NASDAQ Securities Depository hf. are considered systemically important infrastructure.