Author: | Published: 9 Jul 2001
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Market overview

Regulatory environment

Banking in Iceland is given a legal framework in the Act on Commercial Banks and Savings Banks No. 113/1996 of July 12 1996. Supervision is exercised by the Financial Supervisory Authority (FSA) in accordance with the Act on Public Financial Supervision No. 87/1998 of June 16 1998.

Banking law in Iceland has in recent years been brought into line with Directives applicable in the EU after Iceland became a founding member of the European Economic Area (EEA) on January 1 1994. As of the beginning of 1994 all foreign exchange controls were abolished, with the exception of statistical reporting.

State-owned banks incorporated as limited liability companies

Of the four commercial banks, two are state-owned. In 1997 a major change in the organization of the state-owned banks took place. By an Act of Althing of May 12 No. 50/1997, the state-owned banks were incorporated as limited liability companies, effective as from January 1998, with the Treasury as the only shareholder and the Minister of Commerce acting for the shareholder. The Treasury continues to be liable as owner for all obligations of the state-owned limited liability banks incurred before their incorporation, ie January 1 1998 and the Treasury's liability continues in full force until the relevant obligation is fulfilled. For obligations incurred by the banks, ie Landsbanki Íslands hf. and Búnaðarbanki Íslands hf., after January 1 1998, the usual law regarding liabilities of limited liability companies applies, ie the Act on Public Limited Liability Companies No. 2/1995. As the shareholder the Minister of Commerce appoints the board of directors.

Size of the banking system

At the end of 2000 there were four commercial banks in operation, of which two were state-owned, and 30 savings banks. The size of the population should be kept in mind when considering the size of the banking system and its deposits and assets. Iceland has a population of 282,800. The rate of exchange of the Icelandic króna (IKr) against the US dollar is $1=105IKr on 18 June 2001.

The assets on the balance sheets of commercial banks at the end of 1999 totaled ISK 485 billion ($4.6 billion) and in the savings banks ISK116 billion. The commercial banks reported a profit in 1999 of ISK4.7 billion while the savings banks reported a profit of ISK1.2 billion. The whole banking system reported a net return on equity (ROE) of 5% in 2000, which was a sharp decline from the previous year's net return of 17%.

Regulatory agencies

By the Act on Public Financial Supervision No. 87/1998, the Bank Inspectorate and the Insurance Supervisory Authority were merged into a separate entity, the Financial Supervisory Authority (FSA). The FSA has a board of directors appointed by the Minister of Commerce. Under the Act it is incumbent upon the FSA to inspect and supervise the activities of deposit taking institutions.

Supervisory authorities in countries within the European Economic Area are permitted to conduct checks in branches in Iceland of institutions based in those countries, after notification to the FSA.

Regulatory issues

Capital adequacy

Article 54 of the Act on Commercial Banks and Savings Banks provides that the own funds of banks, as defined, must not at any time be less than 8% of risk-adjusted assets and off-balance sheet items, ie the total assets of the bank concerned, in accordance with the rules set by the Central Bank regarding the assessment of risk-adjusted assets and off-balance sheet items for the calculation of solvency ratios of the banks.


Under the Act on Commercial Banks and Savings Banks, and similar provisions in the acts on other financial institutions, bank directors, bank managers, auditors and other employees of banks are obliged not to divulge any information concerning the personal circumstances of the clients of the relevant institutions and other matters of which they become aware in the course of their work and which should be kept secret according to law or the nature of the case. These rules apply unless a judge decrees that the information must be supplied to a court or the police or there is a duty in law to provide the information.

Other issues

Non-bank financial institutions

The Act on Credit Institutions other than Commercial Banks and Savings Banks was enacted in 1993 (Act No. 123/1993). It governs the activities of such institutions as investment banks. Non-bank financial institutions are subject to exactly the same rules on capital ratios, audits, inspections, dissolution and mergers as banks.

In 1997 the four state-owned investment funds were merged and incorporated into the Industrial Investment Bank with share capital of approximately $95 million. In 1999 the bank was fully privatized. In 2000, Íslandsbanki hf. (the second largest commercial bank) and the Industrial Investment Bank merged under the name Íslandsbanki-FBA, now Íslandsbanki. Íslandsbanki is the largest bank in Iceland with a market capital of approximately IKr50 billion. The merger prompted the two state-owned banks to engage in merger discussions, but an unfavorable opinion by the Competition Agency ended the discussions.

Foreign bank operations

Commercial and savings banks based in countries of the European Economic Area and which have received operating licences from the competent authorities in those countries may establish branches in Iceland two months after the FSA receives an announcement to this effect from the competent authorities in their home countries.

The FSA must obtain from the competent authority in the home country of the foreign bank the following information:

  • a description of the activities of the branch, its structure and proposed activities in Iceland;
  • confirmation that the proposed activities are permitted in the home country;
  • the address of the branch;
  • the names of managers of the branch;
  • the amount of own funds and the solvency ratio of the bank; and
  • measures taken in the home country, where these exist, to guarantee deposits in the branch.

Foreign commercial and savings banks, based in countries of the EEA and which have received operating licences from the competent authorities in those countries, may provide services in Iceland without establishing branches, after the FSA has received a notification to that effect from the competent authorities in the home country concerned. According to the Ministry of Commerce, banks in other OECD countries will receive operating licences in Iceland on similar conditions.

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