First meeting of the Financial Stability Council 2017
The first meeting of the Financial Stability Council in 2017 was held on Thursday 6 April at the Ministry of Finance and Economic Affairs.
In mid-March, virtually all of the remaining capital controls on households and businesses were lifted. There is considerable uncertainty about the impact of full liberalisation on the domestic economy; however, it is likely that the economy will be more sensitive to change in international financial conditions. Macroeconomic conditions have been broadly favourable for the financial system in the recent term. GDP growth is strong, and unemployment is well below estimated long-term unemployment. Private sector debt continues to fall. Credit growth has been modest, and the terms offered to resident borrowers in foreign credit markets have improved. Iceland's international investment position is the most positive in the history of comparable data and is relatively favourable in comparison with that of other developed countries. The trade surplus has been unusually large in spite of the appreciation of the króna. On the other hand, there are growing demand pressures in the economy, as can be seen in the housing and labour markets. House prices have risen rapidly since the Financial Stability Council held its last meeting, with real prices reaching a level similar to that before the financial crisis in the fall of 2008. Construction costs are not rising as rapidly as house prices, creating favourable conditions for the construction of new houses. Rising house prices could exacerbate financial system risk further ahead. The banks are quite resilient, however, in terms of both capital ratios and liquidity.
Risks related to the first intermediate objective were discussed, and the four core indicators for that objective were reviewed: real credit growth to households and businesses, real increases in residential and commercial real estate prices, credit intensity, and the credit-to-GDP gap. Conditions in the housing market were discussed, as was the connection between the market, on the one hand, and credit growth and the financial system, on the other.
It was decided to recommend that the Financial Supervisory Authority keep the countercyclical capital buffer unchanged at 1.25%. The financial cycle has continued upwards at a pace broadly similar to that projected at the Systemic Risk Committee's last meeting. The Financial Stability Council can therefore be expected to recommend that the build-up of the countercyclical capital buffer continue in the coming term, in line with the upward financial cycle.
It was agreed that the Housing Financing Fund, Arion Bank hf., Landsbankinn hf., and Íslandsbanki hf. remain classified as systemically important supervised entities and that the capital buffer for systemically important financial institutions – i.e., the three banks – remain unchanged at 2%. A recommendation regarding this buffer will be sent to the Financial Supervisory Authority following the meeting.
The incorporation of EU Regulation no. 575/2013 on prudential requirements for credit institutions and investment firms into the EEA Agreement was discussed. The Regulation contains a new rule (in Article 501) providing for capital requirements deductions for exposures to small and medium-sized enterprises. The potential impact of this rule on Icelandic financial institutions' capital requirements was reviewed.
Also discussed was the purchase by four investment funds of a stake of just under 30% in Arion Bank, marking the beginning of changes in the ownership structure of the bank.
The Financial Stability Council's next meeting will be held on 20 June 2017.