Icelandic banks pass the FME stress test
The three Icelandic commercial banks and Straumur Burdaras Investment bank, all pass the regular stress test of the Icelandic Supervisory Authority (FME).
The FME has calculated the effects of simultaneous shocks on capital ratios of the largest Icelandic banks. The shocks imply that a financial undertaking must be in a position to take on certain setbacks that simultaneously may lead to changes in the value of shares, market bonds, non-performing/impaired loans and appropriated assets and the Icelandic krona without having its capital adequacy ratio drop below 8%. In addition to the formal stress tests the FME conducts various stress tests as deemed necessary in each case. The FME is now revising the stress test criteria and stress test methodology in the light of Pillar II requirements under Basel 2 rules.
The Director General of the FME, Mr. Jónas Fr. Jónsson, says that results from the stress test show that the Icelandic banks are robust and their capital-ratios are solid. “These results show that the banks can withstand severe shocks. In addition, the half-year results of the Icelandic commercial banks show in general strong operations. If we only look at return on equity before taxes, excluding trading gains and irregular income it is between 15%-19%, which must be considered respectable”. Mr. Jónsson says that these are important factors for the Icelandic commercial banks in relation to possible further expansion abroad as well as in light of recent turmoil in international markets relating to the problems with sub prime mortgage instruments in the US market. “The information that the FME has gathered illustrate that only a negligible portion of the banks risks, ca. 3% of own funds, is connected to American instruments of that type.” “However it is evident by the recent turbulence in the financial markets that even though the banks have a strong position they should be very observant with regards to asset quality”, says Mr. Jónsson.
The effects of aforementioned simultaneous shocks on capital ratio are following as of end of June 2007.
| End of June 2007 |
Kaupthing Bank |
Glitnir Bank |
Landsbanki |
Straumur Burðarás* |
| Capital Ratio (CR) |
13.4% |
13.2% |
12.5% |
28.4% |
| Thereof Tier 1 |
10.3% |
9.4% |
11.1% |
25.9% |
| Capital Ratio (CR) after stress test |
12.3% |
12.5% |
10.0% |
24.7% |
| Stress test effect |
1.1% |
0.7% |
2.5% |
3.7% |
*The calculation of the CAD-ratio for Straumur-Burðarás is based on currency risk in relation to the euro. The bank's accounting is presented in euros as of January 2007
The Stress-test from EoY 2006 is available here.