Rules on FME criteria for assessing the exposure of financial undertakings and their capital adequacy


The FME has issued Rules No 177/2006 amending Rules No 530/2004 on FME criteria for assessing the exposure of financial undertakings and decisions on capital adequacy ratios above the statutory minimum. The amending Rules were issued 17 February 2006 and entered into force 10 March 2006 when published in the Legal Gazette. The draft to the amending Rules was introduced in a discussion paper No 4/2004 issued by FME in December 2005.

The Rules No 177/2006 amend Article 3 of the Rules No 530/2004. The main changes are following:

  • Firstly, the stress test regarding share portfolio in domestic companies at own risk is increased from 25% to 35%. This change is done in the light of the considerable increase of shares listed on the Iceland Stock Exchange in last few years.
  • Secondly, a new criteria is added to the stress test which contain the influence of a weakening of the Icelandic krona (ISK) on the capital base and risk weighted assets when calculating the capital adequacy ratio. Due to mismatch in the ratio of the foreign currency denominated part of the capital base on one hand and the risk weighted assets on another hand, especially in the case of the commercial banks, the influence of a weakening of the ISK (an increase in the value of the foreign currencies measured in ISK) on the capital adequacy ratio can be considerable. The new criteria contain 25% increase of the value or foreign currencies measured in ISK which is equivalent to 20% weakening of the krona. It is necessary to have in mind that this percentage criteria was decided before the weakening of ISK that has happened in the period from mid February to mid March 2006.
  • Thirdly, the term impaired loan is added to the term non-performing loan. Impaired loan is a term used in the financial statements composed in accordance with International Financial Reporting Standards.

The stress test according to the Rules No 530/2004, with later amendments, implies that a financial undertaking must be in a position to face setbacks that simultaneously may lead to changes, as specified in the Rules, 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%. By implying that all of these types of shocks could happen simultaneously the stress test shows the resilience of the financial undertaking in question. It must be considered unlikely that such shocks would happen at the same time in reality. Calculations done by the FME on the influence of the above mentioned stress test on the capital adequacy ratios for the commercial banks in Iceland, based on the figures from the financial statements e.o.y. 2005, show that all the banks pass the stress test without going below the 8% minimum capital adequacy ratio.
Further information is provided by: Ragnar Haflidason, tel.: +354 354 5252700Call icon


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