Stress Test

29.12.2006

In a recent news item, displayed on FME’s homepage 14. March 2006, FME announced amendments, identified as rules no. 177/2006, to rules no. 530/2004 regarding criteria for setting capital adequacy ratios for financial undertakings above the statutory minimum. In the news item it was stated that all the banks had passed FME’s stress test based on their financial position at year end 2005.

The part of the stress test which relates to loan losses has been based on non-performing/impaired loans which are currently at a historical low. For that reason FME has decided to compute the impact of an additional shock, as per the following assumptions:
Additional impairment/writedown of loans, other than mortgage loans, to domestic customers, amounting to the highest writedown ratio experienced by the commercial banks in the past ten years (1.8%) and the highest writedown ratio in the past ten years for the largest savings banks (2,0%)
Additional impairment/writedown of mortgage loans of 0.2% which is the highest writedown ratio experienced by House Financing Fund in the past seven years. It should be noted in this context that the ratio of final loan losses of the Fund is less than 0.1%.

The result of these new assumptions is that for the commercial banks and the six largest savings banks, additional loan losses would amount to ISK 24bn. based on their financial position at year end 2005. This compares to a ISK 7bn. loss based on  20% impairment of non-performing/impaired loans (the prior test relating to increased loan losses). Average reduction in capital ratios, in addition to former assumption on loan loss, amounts to 0,5% for  the commercial banks and about 1,1% for the largest savings banks. Each financial undertaking in question does pass the stress test with these new assumptions.

For further information, please contact Ragnar Haflidason on tel: +354 5252700.

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