Icelandic Parliament Considers Sweeping Changes to Financial Regulatory Framework

Strengthening Financial Stability and Resilience

In an effort to bolster financial stability and resilience, the Icelandic parliament is poised to introduce significant changes to its regulatory architecture. The proposed overhaul aims to create more powerful institutions and ensure that they are better equipped to identify and mitigate potential risks.

Decision-Making Process

Under the new framework, key decisions would be made by a majority vote, with the chairperson’s casting vote serving as a tiebreaker in case of a deadlock. This approach is expected to foster greater efficiency and accountability within the regulatory bodies.

Clarifying Roles and Responsibilities

The proposed changes seek to clarify the roles and responsibilities of various institutions, including:

• The Central Bank of Iceland (CBI), which would be entrusted with overseeing:
  • Liquidity
  • Foreign exchange exposures
  • Short-term repo markets
• The Financial Supervisory Authority of Iceland (FME), which would have sole responsibility for resolution

Additionally, the FME would be responsible for ensuring that financial institutions are structured and operated in a way that minimizes disruption to the financial system. This would involve reducing distortions and incentives that could potentially exacerbate instability.

Greater Collaboration

The proposed framework envisions greater collaboration between the CBI and FME, with both bodies working together to identify:

• Structural factors that may lead to financial instability
• Key metrics for reporting and monitoring purposes

Key Components of Proposed Framework

1. Majority Vote with Chair’s Deciding Vote: Key decisions would be made by a majority vote, with the chairperson’s casting vote serving as a tiebreaker in case of a deadlock.
2. Clarified Roles and Responsibilities: The CBI and FME would have distinct responsibilities, with clear reporting lines and regular updates on key metrics.
3. Greater Collaboration: The CBI and FME would work together to identify structural factors that may lead to financial instability.
4. Accountability: Greater accountability would be introduced through clear reporting lines and regular updates on key metrics.
5. Financial Stability Objectives: Clear objectives for financial stability would be defined in statute, with both the CBI and FME responsible for achieving these goals.

Impact and Outlook

The proposed changes are expected to have a significant impact on Iceland’s financial regulatory landscape, and are seen as a vital step towards creating a more robust and resilient system. By clarifying roles and responsibilities, introducing greater collaboration and accountability, the country can better withstand potential shocks and maintain financial stability.