COPENHAGEN Oct 12 Icelandic banks, recovering
from a 2008 financial crisis, face tighter capital requirements
to withstand any future downturns even as the country's economy
improves, the central bank said Wednesday.
Iceland is in the process of re-joining the international
financial community, as it slowly lifts capital controls imposed
following the crisis, which led to the default of three banks.
"Under the current favourable external conditions, it is
essential that financial institutions preserve their resilience
so that they will be able to weather economic headwinds later
without significant disruption of their activities," the central
bank said in its Financial Stability report.
Icelandic banks have reduced their credit risks and
increased liquidity ratios. Last month, Moody's credit rating
agency upgraded Iceland's government ratings to A3 with a stable
The so-called countercyclical capital buffer should be
increased by a further 25 basis points to 1.25 percent, the
central bank report said.
Central banks raise the countercyclical buffer if they think
lending conditions are getting too buoyant, forcing banks to
build up their capital reserves to prepare for any possible
Iceland's Financial Supervisory Authority had received a
recommendation to increase the buffer and intends to follow it,
a spokesman told Reuters on Wednesday.
The initial capital buffer rules will enter into force in
March next year and the additional 25 basis points will be added
in November, 2017, he said.
Propelled by borrowed money, Iceland's banking sector grew
rapidly leading up to the financial crisis of 2008, but
defaulted when the United States and the EU tightened credit.
In August, the central bank cut its key deposit interest
rate by 50 basis points to 5.25 percent, signalling a
normalization of the economy.
(Reporting by Nikolaj Skydsgaard; editing by Jacob
Gronholt-Pedersen and Susan Thomas)