The Icelandic financial system

There are five commercial banks and ten savings banks operating in Iceland offering a full range of financial services including regular lending, deposit and current account services. Also operating in Iceland are 8 credit undertakings, 13 securities companies and 9 insurance companies (life and non-life insurance) offering a wide range of financial services for homes and businesses.

As a member of the EEA Agreement the legal framework in which Icelandic financial institutions and companies operate is based on European Union directives. The EEA Agreement also makes the Icelandic financial system a part of the European Single Market area.

Parties subject to the financial supervision of the Icelandic Financial Supervisory Authority (FME) are commercial banks, savings banks, credit undertakings, deposit departments of co-operative societies, securities companies, securities brokerages, management companies of UCITS, stock exchanges, central securities depositories, pension funds, insurance companies and insurance brokers licensed to operate in Iceland.

Despite the financial collapse in October 2008 the banking system continued to operate, payment system remained functioning and customers could obtain all general banking services in bank branches. The commercial banks have now been recapitalized by the Icelandic government and creditors with a strong capital adequacy ratio of 16% and a 12% Tier 1 ratio. Since the financial collapse much focus in the financial system has been on debt restructuring and Icelandic financial companies offer a variety of solutions to reduce debt burdens of homes and businesses.

Mortgage financing

Mortgage financing in Iceland is predominately inflation indexed 25-40 year mortgages with the principal following the consumer price index. Majority of mortgage financing has been through the State Housing Fund (HFF) although the banks are offering a wide range of mortgage financing options including non-inflation indexed mortgages. There is a ceiling on mortgage levels and applicants are means-tested.

Pension funds

Pension funds are one of the largest institutional investors in Iceland controlling net assets worth ISK 1.935 billion or 126% of GDP in January 2011. They are large investors in equities and bonds in domestic and foreign markets managing approximately ISK 481 billion (31% of GDP) in foreign securities. Pension funds are large players in the mortgage market by buying mortgage bonds and own lending activities.

Central Bank of Iceland

The Central Bank of Iceland is an independent institution, owned by the Icelandic state but under separate administration. Monetary policy and the application of monetary policy mechanisms are decided by the Central Bank´s Monetary Policy Committee. The main goal of monetary policy is to maintain price stability. In addition to a 2.5% inflation target the Central Bank has a currency stability target which influences its policy rate decisions.

The Central Bank has a variety of roles within the Icelandic financially system including promoting price- and financial stability, issuing notes and coins, handling exchange rate matters, acting as a lender of last resort to the Treasury and financial system, maintaining and investing Iceland´s foreign reserves and handling borrowing by the Republic of Iceland.

Iceland Stock Exchange - NASDAQ OMX Iceland

NASDAQ OMX Iceland, a part of NASDAQ OMX Group, Inc., is a regulated securities market where securities are officially listed and traded. Equity listing fulfils the harmonized minimum requirements of the EU Directives which apply in the EEA for official listing of securities on a stock exchange. Other securities listed include various types of bonds, unit share certificates of mutual funds and investment funds and shares in investment funds. Issuers of securities must apply for listing of the securities. Only exchange members can place orders for their customers and trade in the trading system.