Iceland’s Banking Industry Regulatory Bodies Undergo Significant Overhaul

Strengthening Financial Stability in Iceland

July 28, 2023 - Since its previous assessment in 2014, Iceland has made substantial progress in strengthening its banking regulatory and supervisory framework. The Ministry of Finance and Economic Affairs (MoFEA) and the Central Bank of Iceland (CBI) have spearheaded a comprehensive legislative reform agenda aimed at bolstering financial stability.

Key Milestones

• Transposition of EU legislative frameworks: Icelandic banking law has been updated to align with European Union (EU) standards, ensuring greater consistency across the region. • New law for banking resolution: A new law has been introduced to provide a framework for resolving bank failures in an orderly and efficient manner. • Establishment of the Resolution Authority: The CBI has established a dedicated authority responsible for managing bank resolutions, enhancing financial stability. • Adoption of Basel III standards: CBI has implemented liquidity requirements based on Basel III standards, strengthening banks’ ability to withstand economic shocks.

Risk-Based Supervision

The Central Bank has fully implemented its risk-based supervisory framework, focusing on high-impact financial institutions. This approach enables off-site supervisors to conduct in-depth analysis of:

• Capital: A bank’s capital structure and adequacy • Liquidity: A bank’s ability to meet short-term obligations • Business models: A bank’s underlying business strategy and operations • Governance: A bank’s corporate governance structure and decision-making processes • Internal controls: A bank’s internal control systems and risk management practices

Anti-Money Laundering (AML) and Combating the Financing of Terrorism (CFT)

CBI, along with other relevant agencies, has developed and implemented a new AML/CFT legislative and supervisory framework for banks. This framework is now applicable to all regulatory institutions regulated by CBI since its merger with the Financial Supervisory Authority.

Conclusion

Iceland’s significant overhaul demonstrates its commitment to maintaining financial stability and ensuring the effective supervision of its banking sector. The country’s efforts have strengthened its regulatory framework, enhancing the overall resilience of its financial system.