APPENDIX: Observance of Financial Sector Standards and Codes—Summary Assessments and Factual Updates
This FSSA Update mission focused on a reassessment of financial sector stability conditions in Iceland, production of a new BCP assessment, and factual updates of the various ROSCs that were assessed in the initial 2000-01 FSSA report. The mission visited Reykjavik from April 1 to April 10, 2003, and included Mr. Paul Kupiec MFD (Mission Head), and Mr. Tuomo Malin of Finland’s Financial Supervision Authority, an expert on banking supervision. The mission met with the authorities at the Central Bank of Iceland (CBI), the Financial Supervisory Authority (FME), officials from four commercial banks, a savings bank, the Iceland Stock Exchange, The Housing Financing Fund (HFF), two pension funds, The National Debt Agency, the Ministry of Commerce (MIC), and accounting experts.
On May 27, 2003, two of Iceland’s five commercial banks were joined in a merger.
A significant share of the profits of the bank posting the highest return was generated by divesting part of a recently merged firm.
The largest savings bank’s profit was boosted by a one-time tax effect.
Mortgages secured by residential property are subject to a 50 percent risk weight.
The proposed revisions in the New Basel Accord will lower the risk weights on residential mortgages.
Additional foreign currency borrowings by the HFF must be set in accordance with yearly national parliamentary budgets, but the size of these exposures is not limited by law or regulation.
There is no price index for unlisted shares. These shares reportedly are heavily weighted toward small technology and biotechnology companies. Unlisted shares are illiquid and have lost significant value in recent years.
Solvency margins represent the difference between the sum of a fund’s net asset value (bonds are accounted for at historical costs) and the net present value of future premiums, and the present value of current and future actuarial pension obligations. The difference is expressed as a percentage of the present value of the fund’s liabilities. If the difference is in excess of 10 percent, or 5 percent for five consecutive years, the pension fund must alter its articles of association and change contribution rates and/or current and future planned member benefits in order to return the fund to a proper prudential balance (0 deficit).
There are also over 200 foreign firms that are licensed to transact business in Iceland under EEA agreements.
Of the firms that have reported 2002 results (all the large firms), one life insurance company has a solvency ratio below 1.25, and the firm with a solvency ratio of 1.23 in 2001 significantly improved its position. The Ministry of Industry and Commerce (MIC) retains insurance licensing powers.
The assessment was made by Mr. Tuomo Malin of the Financial Supervision Authority of Finland in April 2003.