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Iceland: Financial Sector Assessment Program-Technical Note on Stress Testing and Systemic Risk Analysis
Author:
International Monetary Fund. Monetary and Capital Markets Department
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Series:
IMF Staff Country Reports
Volume/Issue:
Volume 2023: Issue 276
Language:
English
Publication Date:
28 Jul 2023
DOI:
https://doi.org/10.5089/9798400251306.002
ISBN:
9798400251306
ISSN:
1934-7685
Pages:
119
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
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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.
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Cover IMF Staff Country Reports
IMF Staff Country Reports
ISSN:
1934-7685
Publisher:
International Monetary Fund