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Europe > Iceland

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Cover Global Financial Stability Notes
Pension Funds and Financial Stability
This Global Financial Stability Note examines the growth of the pension fund sector and the potential financial stability implications. Historically, pension funds have been seen as a contributor to financial stability because of their long-term and well-diversified liabilities. However, the sector has undergone significant structural shifts accelerated by a prolonged period of low interest rates, increasing its exposure to traditional risks while introducing emerging risks; this is reflected in growing intra-financial sector interconnectedness and exposure to long-term sovereign bonds. The recent transition to higher interest rates should be positive for the pension sector, albeit its pace and abruptness has been associated with liquidity stress and contagion risks in some countries.
Keywords:
Pension Funds; Financial Stability; Assets; Risks; Pension Plans; major pension fund sector; IMF Library; major pension savings market; structural liquidity; asset-liability duration mismatch; risk analysis; Pension spending; Pensions; Financial sector stability; Liquidity risk; Global
Cover IMF Staff Country Reports
St. Kitts and Nevis: Selected Issues
International Monetary Fund. Western Hemisphere Dept.
This Selected Issues paper on St. Kitts and Nevis studies economic benefits from energy transition. Cheaper and more stable energy prices can support macroeconomic stability. In addition to the aforementioned effects, low and stable energy prices can mitigate the adverse impact from terms-of-trade shocks and reduce inflation volatility, thus contributing to smoothing out economic cycles. The energy landscape of St. Kitts and Nevis calls for energy reform. The two islands of St. Kitts and Nevis rely heavily on fossil fuels, primarily diesel, to power their grids without Interconnection. The analysis uses cross-country examples to examine the channels through which the adoption of renewable energy on a large scale can yield numerous long-term economic benefits. Transitioning to domestic renewable energy sources could stabilize domestic energy prices and reduce the volatility of inflation. A sharp reduction in energy costs in St. Kitts and Nevis could promote sectoral diversification. High-energy costs can prohibit economic diversification, particularly into energy intensive industries.
Keywords:
energy transition index; staff team of the International Monetary Fund; carbon capture in St. Kitts and Nevis; inflation volatility; copyright page; Renewable energy; Electricity; Energy prices; Non-renewable resources; Caribbean; Global
Cover High-Level Summary Technical Assistance Reports
Project Summary: Nordic-Baltic Technical Assistance Project – Financial Flows Analysis, AML/CFT Supervision, and Financial Stability
Ms. Grace Jackson
,
Maksym Markevych
,
Antoine Bouveret
,
Pierre Bardin
,
Alexander S Malden
,
Santiago Texidor Mora
, and
Indulekha Thomas
This paper focuses on the summary of Nordic-Baltic Regional Technical Assistance Project Financial Flows Analysis, Anti-Money Laundering and combating the Financing of Terrorism (AML/CFT) Supervision, and Financial Stability. Various international banking scandals concerning AML/CFT breaches have taken place in the Nordic Baltic region, with far-reaching financial and reputational consequences. Financial integrity issues could potentially present risks to financial stability in the short and medium term. The depth of geographic ML/TF risk analysis and understanding differs among the Nordic-Baltic countries. There has been clear investment in ML/TF risk models across the region, but some gaps remain, notably, advanced data collection and analysis. Quantifying the financial stability impact of money laundering shocks is an understudied area. AML/CFT regimes in the region would benefit from better understanding of the ML threats associated with cross-border financial flows and nonresident activities. In order to address cross-border AML vulnerabilities, efforts to enhance the supervisory understanding of ML risks, strengthen the risk-based supervision of banks and crypto asset service providers, and deepen cooperation should continue.
Keywords:
Anti-Money Laundering; Combatting the Financing of Terrorism; Money Laundering Shocks; Financial Stability; Illicit Financial Flows; Machine Learning; and Risk-Based Supervision
Cover IMF Staff Country Reports
Iceland: Financial Sector Assessment Program-Technical Note on Management and Supervision of Climate-Related Financial Risks in the Banking Sector
International Monetary Fund. Monetary and Capital Markets Department
This technical note on Iceland presents analyses management and supervision of climate-related financial risks in the banking sector. The Icelandic authorities are committed to addressing climate change issues and reaching ambitious objectives to reduce greenhouse gas emissions. Domestic coordination with the Central Bank of Iceland (CBI) should be enhanced to support adequate consideration of climate-related financial risks within the financial sector. CBI should as soon as possible address the data quality and availability issues on climate-related financial risks. CBI has started to incorporate climate-related financial risks within the macroprudential surveillance and supervisory processes. The intensity and thoroughness of systematic supervision of climate-related financial risks within the banking sector should be gradually increased. In addition, banks should fully incorporate climate-related financial risks into their risk management frameworks in addition to their commendable efforts toward transparency. Finally, CBI should determine whether banks’ capital and liquidity buffers are adequate to cover climate-related financial risks.
Keywords:
climate-related financial risks; government initiative; EU norm; Climate-Related Financial risk; Iceland's strategy; Climate change; Commercial banks; External balance assessment (EBA); Credit risk; Global
Cover IMF Staff Country Reports
Iceland: Financial Sector Assessment Program-Technical Note on Financial Safety Net Crisis Management
International Monetary Fund. Monetary and Capital Markets Department
This technical note focuses on financial safety net crisis management in Iceland. This paper assesses and makes recommendations regarding the different elements of the financial safety net in Iceland. The scope of the assessment includes the institutional arrangements for recovery, resolution, and crisis management; the oversight of banks’ recovery plans; the legal regime for bank bankruptcy and resolution; resolution planning by the authorities; the funding mechanism to support resolution; the deposit guarantee scheme; and the government authorities’ collective preparedness to deal with financial crises. The current institutional framework for crisis management lacks formal involvement of the Ministry of Finance. The regime for banks that are systemic adheres to the internationally agreed resolution standards. The legal regime for bankruptcy and liquidation of banks that are not systemic is sound. The Deposit Guarantee Fund should be strengthened in line with EU requirements of the Deposit Guarantee Scheme Directive. Finally, the authorities’ collective contingency planning for financial crisis (including testing of plans) should be intensified.
Keywords:
B. bank insolvency; recovery planning; financial crisis preparedness; asset portfolio; market funding; resolution plan; Bank resolution framework; Lender of last resort; Bank resolution; Financial sector stability; Baltics; Europe
Cover IMF Staff Country Reports
Iceland: Financial Sector Assessment Program-Technical Note on Cyber and Operational Resilience, Supervision and Oversight
International Monetary Fund. Monetary and Capital Markets Department
This technical note focuses on cyber and operational resilience, supervision and oversight in Iceland. The Icelandic financial sector has not experienced seriously disruptive cyber-attacks or operational issues in recent years, but threats are growing. Iceland’s dependence on international connectivity for both debit and credit card systems introduces a significant vulnerability into the payment system. There is no dedicated cyber security strategy for the finance sector. Operational risk experts in the Central Bank of Iceland (CBI) are experienced and well regarded by financial institutions, but more resources are needed to provide adequate coverage of this increasingly important area. The supervision of financial institutions’ cybersecurity is highly dependent on self-assessments by the regulated entities themselves and independent reviews carried out by third parties. CBI should regularly revise the list of critical operations and critical service providers for internal use and for presentation to the Financial Stability Committee and Financial Stability Council. CBI is encouraged to enhance its incident dashboard by summarizing cyber incidents and examining trends.
Keywords:
C. supervision approach; payment services directive; markets authority; market infrastructure; cash payment; Cyber risk; Financial sector stability; Financial sector; Payment systems; Operational risk; Europe; Baltics; Global
Cover IMF Staff Country Reports
Iceland: Financial Sector Assessment Program-Technical Note on Macroprudential Policy
International Monetary Fund. Monetary and Capital Markets Department
This technical note highlights macroprudential policy in Iceland. Macroprudential policy in Iceland recently has centered on the property market, given the importance of this market for households’ balance sheets, banks’ loan portfolios, and the potential systemic risks. The Central Bank of Iceland (CBI) has a strong institutional framework for macroprudential policy, assuring the willingness to act. The macroprudential framework also promotes the ability to act promptly. As the financial supervisor, the CBI has control over prudential tools; it may exercise its power as necessary to ensure financial stability. The institutional arrangements encourage effective cooperation and coordination with other institutions. CBI surveillance and systemic risk assessment rely on comprehensive quantitative information and constructive dialogue with the industry as well as on various models and stress tests. The strong analytical capacity for systemic risk monitoring can be further enhanced by filling data gaps and enriching models. While recent measures go in the right direction, the authorities should stand ready to take further actions if vulnerabilities persist.
Keywords:
capital markets department; Macroprudential decision making; housing market Mispricing; house price misalignment; CBI share; Financial sector stability; Macroprudential policy; Systemic risk; Loans; Mortgages; Global; Baltics
Cover IMF Staff Country Reports
Iceland: Financial Sector Assessment Program-Technical Note on Anti-Money Laundering/Combating the Financing of Terrorism
International Monetary Fund. European Dept.
This technical note analyses anti-money laundering/combating the financing of terrorism (AML/CFT) in Iceland. Iceland’s banking sector is comparatively small, and the geographical reach of cross-border payments activity is limited. The AML/CFT supervisory understanding and assessment of ML and terrorism financing (TF) risks in the banking sector has improved in recent years. Further refinements to the supervisory risk assessment tools and increased data collection will enhance the accuracy of the authorities’ focus for AML/CFT risk-based supervision of banks. Iceland has taken significant steps to establish a registration regime for virtual asset service providers (VASP) established in or operating in the country, however, efforts should continue to detect unlicensed activities. Going forward, a continued focus on thematic inspections would be a welcome. In some instances, the pace of completion of inspections has been slow. To drive meaningful change in the levels of AML/CFT compliance and the effectiveness of AML/CFT controls in banks (in particular, enterprise ML/TF risk assessment, customer due diligence, and suspicious transaction reporting), an enhanced supervisory presence through more frequent onsite activities and an increased pace in the completion of inspections would be beneficial.
Keywords:
TF risk assessment model; FSAP's finding; TF risk assessment; swift data; supervision of bank; Anti-money laundering and combating the financing of terrorism (AML/CFT); Financial Sector Assessment Program; Terrorism financing; Commercial banks; Correspondent banking; Baltics; Global
Cover IMF Staff Country Reports
Iceland: Financial Sector Assessment Program-Technical Note on Pension Fund Regulation and Supervision
International Monetary Fund. Monetary and Capital Markets Department
This technical note analyses the key aspects of the regulatory and supervisory regime for pension funds in Iceland. Pension funds in Iceland play a vital role in the domestic financial sector, acting as investors and lenders. This Financial Sector Assessment Program (FSAP) reviews recent developments and the structure of the Icelandic pension fund sector. This technical note provides context on the Icelandic pension system, focusing in particular on the compulsory occupational scheme in Pillar II, the most important pillar of the system. The pension fund sector is large, well developed, and highly interconnected with the domestic financial system, mainly through exposures toward banks and domestic investment funds. A separate technical note summarizes the results of the risk analysis carried out for the pension fund sector and elaborates more on current market risk sensitivities. The governance and internal controls framework for pension funds is not aligned with the systemic role of the sector, and the underlying rules in the Pension Fund Act pre-date the corresponding provisions for other financial sectors. The Financial Supervisory Authority has adopted a risk-based and forward-looking supervisory model, however there is no minimum frequency set for on-site inspections. The FSAP recommends a strengthening of the legislative framework, especially regarding governance, internal controls and outsourcing.
Keywords:
pension fund regulation; finance disclosure regulation; insurance supervisor; staff team of the International Monetary Fund; pension supervisor; Pension spending; Financial stability assessment; Pensions; Internal controls; Pension fund supervision; Europe
Cover IMF Staff Country Reports
Iceland: Financial Sector Assessment Program-Technical Note on Stress Testing and Systemic Risk Analysis
International Monetary Fund. Monetary and Capital Markets Department
This technical note on Iceland focuses on Stress Testing and Systemic Risk Analysis. The Financial Sector Assessment Program took place against the background of a strengthened financial sector in Iceland amid heightened uncertainty in the global economy. The Icelandic financial landscape has undergone significant structural transformation since the global financial crisis with a contracted banking sector. The banking sector is sound, but foreign exchange (FX) funding remains a vulnerability. The scenario-based bank solvency stress test confirmed the sector’s resilience to severe but plausible macro-financial shocks, with gross domestic product influence similar to the Global Financial Crisis. The adverse scenario confirms banks’ resilience to severe yet plausible adverse shocks. Although the adverse scenario produced a significant impact on bank capital ratios, no bank saw its capital ratios falling below the hurdle rates, owing to the high initial capital positions and adequate pre-provision income. The Liquidity Coverage Ratio-based stress test suggests that although the banking system on aggregate is broadly resilient to adverse liquidity conditions, it is not immune to additional liquidity outflows from pension and nonresident FX funding.
Keywords:
fair value; Bank-NBFI network; bank asset composition; bank liquidity position; Tier 1; top-down solvency stress test; stress test; interest rate projection; sensitivity analysis; Pension spending; Stress testing; Commercial banks; Liquidity; Global; Europe