BANKING SYSTEM OF ICELAND

The Icelandic financial system is broadly in line with those of other European and Western nations, and largely in harmony with European Union legislation. In recent years the government has emphasized privatization and economic liberalization. Business credit is offered by commercial and savings banks, investment banks and securities houses.
A strong non-bank sector has evolved, covering stock broking, leasing and a wide range of other financial services. International players are established in insurance and Icelandic finance companies have associations with global funds.

Central Bank

The Central Bank of Iceland has the main objective of ensuring price stability, as defined by an inflation target of 2.5%. The Bank has been granted full independence to implement monetary policy. Any direct access by the government to Central Bank financing has been formally closed. The Bank has put increasing emphasis on monitoring financial stability.
Furthermore, the Central Bank administrates Iceland’s foreign exchange reserves and acts both as fiscal agent for the government and the borrowing agent for the Republic of Iceland in international capital markets.
Standard Central Bank functions with regard to commercial and savings banks and other credit institutions include acting as a lender of last resort and clearing agent. The main monetary instrument of the Central Bank is the rate on repurchase contracts, which are auctioned weekly.

Financial Supervisory Authority

The Financial Supervisory Authority is an independent state authority with its own board of directors, which monitors compliance with laws and regulations covering factors such as liquidity and capital adequacy of parties subject to its supervision and that they are in every respect consistent with sound and proper business practices. Parties subject to supervision are commercial banks, savings banks, credit undertakings (investment banks), deposit departments of co-operative societies, securities companies, securities brokerages, management companies of UCITS, stock exchanges, central securities depositories, pension funds, insurance companies and insurance brokers licensed to operate in Iceland.

Commercial Banks and Savings Banks

There are four commercial banks in Iceland, three of them being listed on the Iceland Stock Exchange. The fourth is owned by 24 local savings banks and acts as their service and clearing bank. In addition, deposit-receiving facilities are operated by the Postal Giro system.
Originally Iceland’s banks were sector-targeted but now all offer a full range of financial services (including non-bank activities through subsidiaries) to businesses and individuals.
Housing mortgages used to be mostly handled by a state agency, but the commercial banks have entered the market. Loans are now disbursed to borrowers in cash, instead of the old tradable housing bonds. Bank services include all regular lending, deposit and current account services. Interest rates and other terms vary considerably and are determined by market forces. Companies and individuals can hold bank accounts in Iceland denominated in major foreign currencies. Indexation of financial obligations, a legacy from the inflationary 1980s, is being phased out on shorter maturities and no longer applies to financial obligations for a shorter period than five years. One striking feature of banking activities in Iceland is the predominance of electronic transactions. Cheques are becoming quite rare in day-to-day business and Iceland has the highest per capita payment card ownership in the world, with 400,481 debit cards and 275,967 credit cards in January 2006, among a population of 299,000. Iceland adopted the BIS standard for capital adequacy of commercial and savings banks in 1992.

Banks operating in Iceland:

- Kaupthing Bank Ltd - KB Bank
- Landsbanki Islands Ltd
- Islandsbanki (new name - Glitnir Banki hf.)
- Icebank Ltd
- Sparisjodur - Savings banks group.