The Rules on Credit Institutions’ Liquidity Ratios, no. 1520/2022, took effect on 1 January 2023 and superseded the previous Rules, no. 266/2017. The Rules are set based on the authorisation in Article 117(b), Paragraph 2, Item 82 and the aforementioned Article 117(b), Paragraph 3 of the Act on Financial Undertakings, no. 161/2002. With their adoption, the current European regulatory framework in this area is implemented, specifically Commission Delegated Regulation (EU) 2015/61 and subsequent amendments to it. The EU Regulation is implemented in its entirety by means of a reference found in Article 4 of the Rules. 

The aim of liquidity requirements is to mitigate credit institutions’ liquidity risk by ensuring that they always have sufficient liquid assets to fulfil their obligations under stressed conditions over a specified period of time. EU Regulation 2015/61 requires that credit institutions have available highly liquid assets as these are defined in the Regulation, not only to cover their obligations when due but also to cover potential outflows stemming from withdrawals of deposits, reduced availability of funding, increased collateral requirements, or other circumstances requiring financial outlays under stressed conditions over a 30-day period.

The liquidity ratio is calculated using the following formula:

            Liquidity ratio (%) = Liquidity buffer/(Net liquid outflows over the coming 30 days)

According to EU Regulation 2015/61, credit institutions must do the following:

• Submit reports and maintain at all times a liquidity ratio of at least 100% in all currencies combined. 
• Submit reports and monitor the ratios in significant currencies (i.e., currencies in which liabilities equal or exceed 5% of the credit institution’s total liabilities).
• Ensure that the currency composition of their liquid assets is aligned with the currency composition of their net outflows, with consideration given to weights as specified in the Rules. 

The Central Bank is also authorised to require that credit institutions minimise their currency mismatches by restricting the proportion of liquidity outflows in a specified currency that can be met during a stress period by holding liquid assets in other currencies. Such restrictions apply only to the accounting currency or any currency above the aforementioned reference limits.

The new Rules require that credit institutions satisfy the following minimum requirements: 

• 50% liquidity ratio in Icelandic krónur; cf. Article 3, Paragraph 1 of the Rules.
• 80% liquidity ratio in euros if euro-denominated liabilities constitute 10% or more of their total liabilities; cf. Article 3, Paragraph 2 of the Rules. 

The Rules apply to parent companies and to the group for which a credit institution acts as the parent company. Credit institutions are obliged to submit reports to the Central Bank at least monthly, providing information underlying the calculation of their liquidity ratios, in the form specified in Commission Implementing Regulation (EU) 2021/451; cf. the Rules on Reporting by Financial Undertakings, no. 1163/2022. Liquidity reports for both parent companies and consolidated entities must be submitted to the Bank by the fifteenth day of each month. Liquidity requirements include the 30-day liquidity ratio and must be satisfied at all times. If a credit institution should fall below the minimum, or if it is foreseeable that it will fall below the minimum within the next six months, the institution shall immediately send the Central Bank a written report satisfactorily explaining the reasons for the deviation. The credit institution concerned shall also present a dated schedule of how it intends to restore its liquidity ratio to the regulatory minimum.

In addition to the liquidity reports, credit institutions shall submit deposit and funding summaries (additional monitoring metrics reports, or AMM) for informational purposes. They shall also provide all of the information that the Central Bank requires in order to better assess the liquidity position of the credit institution concerned or to conduct stress testing. Reports are submitted in XBRL format via the Central Bank’s data submittal system. 

• Further information on reporting, etc., from the European Banking Authority (EBA)

The net stable funding ratios (NSFR) required in Iceland accord with the provisions of Regulation (EU) 575/2013 (the Capital Requirements Regulation, or CRR), as amended by Regulation (EU) 2019/876 (CRR II), the latter of which contains provisions on required stable funding. With the passage of Act no. 38/2022 amending the Act on Financial Undertakings and other legislation, which entered into force on 28 June 2022, the CRR was enshrined in Icelandic law in its entirety, together with other Regulations amending the CRR, including CRR II; cf. Article 1(c) of the Act on Financial Undertakings. Previously in effect were Central Bank of Iceland Rules on Credit Institutions’ Minimum Net Funding Ratio (most recently Rules no. 750/2021), which were based on the European regulatory framework, but these have been repealed with the enactment of the CRR (cf. CRR II) in Iceland.

The Rules on Net Stable Funding Ratios aim to restrict maturity mismatches between credit institutions’ assets and liabilities and limit the extent to which credit institutions rely on unstable short-term funding to finance long-term assets. 

The net stable funding ratio (NSFR) is calculated as the ratio of available stable funding to required stable funding: 

            Net stable funding ratio (%) = (Available stable funding)/(Required stable funding)

Required stable funding refers to assets on and off the balance sheet, multiplied by the appropriate weight. It varies directly with the share of long-term or illiquid assets. The loan portfolio, for instance, carries different weights, depending on loan type and maturity. The higher required stable funding is, the more available stable funding is needed. Available stable funding includes, for example, equity, liabilities with a residual maturity longer than one year, and other long-term funding. 

According to the CRR (cf. CRR II), credit institutions are required to:

• Submit reports and maintain at all times a net stable funding ratio of at least 100% in all currencies combined.
• Submit reports and monitor the ratios in significant currencies (i.e., currencies in which liabilities equal or exceed 5% of the credit institution’s total liabilities).
• Ensure that the currency composition of their funding is aligned with the currency composition of their assets, with consideration given to weights specified in the Rules. 

The Rules also authorise the Central Bank to impose specific requirements aimed at minimising currency mismatches by restricting the proportion of required stable funding in specified currencies that may be met with available stable funding in other currencies. Such restrictions apply only to the accounting currency or any currency above the aforementioned reference limits. No specific requirements on net stable funding have been implemented in Iceland. 

The Rules on net stable funding apply to parent companies and to the group for which a credit institution acts as the parent company. Credit institutions shall submit stable funding reports to the Central Bank on at least a quarterly basis, in the form specified in Commission Implementing Regulation (EU) 2021/451; cf. the Rules on Reporting by Financial Undertakings, no. 1163/2022. If a credit institution should fall below the minimum net stable funding ratio, or if it is foreseeable that it will fall below the minimum net stable funding ratio, the institution shall immediately send the Central Bank a written report satisfactorily explaining the reasons for the deviation. The credit institution concerned shall also present a dated schedule of how it intends to restore its net stable funding ratio to the minimum level.

Furthermore, it shall provide all of the information that the Central Bank requires in order to assess the institution’s funding risk more effectively. Reports are submitted in XBRL format via the Central Bank’s data submittal system.

• Information on reporting, etc., from the European Banking Authority (EBA)