Comprehensive strategy for capital account liberalisation announced
Consultation between Central Bank and Minister of Finance and Economic Affairs on exemptions for the three failed banks' estates
October 28th 2015
In the opinion of the Central Bank of Iceland, the draft composition agreements submitted by the estates of the three failed banks satisfy the requirements set forth in the Foreign Exchange Act, in that the implementation of the composition agreements together with the proposed mitigating measures will not jeopardise monetary, exchange rate, or financial stability. This is stated in the Central Bank's report on the settlement of the failed banks' estates on the basis of the stability conditions.
The Minister of Finance and Economic Affairs received a letter from the Central Bank of Iceland dated 26 October 2015, requesting a consultation with the Minister about exemptions from the Foreign Exchange Act, no. 87/1992, for the estates of the three banks, Landsbanki Íslands, Kaupthing, and Glitnir. The exemptions in question pertain to foreign exchange transactions and capital transfers in connection with the composition agreements and final winding-up of the estates.
Any exemption that pertains to a financial institution undergoing winding-up proceedings and authorises foreign exchange transactions and cross-border movement of capital in an amount exceeding ISK 25bn per year requires prior consultation with the Minister, as does any exemption pertaining to a legal entity whose balance sheet is larger than ISK 400bn. If such an exemption could have a substantial impact on Iceland's debt position and affects the ownership of the commercial banks, it may only be granted after consultation with the Minister of Finance and Economic Affairs and after the Minister has made the Parliamentary Economic Affairs and Trade Committee aware of its economic impact.
The Minister of Finance and Economic Affairs and the Governor of the Central Bank presented the Bank's conclusions and the economic impact of granting the exemptions to the Parliamentary Economic Affairs and Trade Committee this morning. The Cabinet and the Committee on Economic Affairs have also discussed the matter.
Following the Minister's presentation to the Economic Affairs and Trade Committee, representatives of the Task Force for Capital Account Liberalisation met with party caucuses and presented a detailed analysis of the impact on the balance of payments and the state of the economy.
Central Bank of Iceland press release
- Central Bank of Iceland report
- English translation to the introduction of the report
- The authorities' liberalisation strategy, assessment of estates' exemption requests, and analysis of their impact
June 8th 2015
Comprehensive strategy for capital account liberalisation announced
- Comprehensive strategy for capital account liberalisation announced
- ISK 1200 billion problem solved; stability ensured
- Stability conditions and stability tax on failed banks' estates
- Currency auction for holders of offshore ISK in the autumn
At a meeting held yesterday, the Government of Iceland agreed to present before Parliament two bills of legislation sponsored by the Minister of Finance and Economic Affairs. Together, the two bills lay the foundation for a comprehensive strategy for capital account liberalisation.
The public interest demands that the capital controls be lifted without jeopardising economic and financial stability. The objectives of the current liberalisation strategy are based on the fundamental principal that the controls must be lifted in stages without upsetting the balance in the economy and without imposing additional financial burdens on the Treasury or the Icelandic people.
The total value of the assets underlying the problem addressed in the authorities' strategy is about 1,200 billion Icelandic krónur. The assets fall into three categories: the ISK assets of the failed banks' estates, which total 500 billion krónur; the estates' foreign-denominated claims against Icelandic residents, which total 400 billion krónur; and the offshore krónur held by non-residents, which total 300 billion krónur. The authorities' strategy prevents these assets from flowing into the foreign exchange market and thereby adversely affecting Iceland's balance of payments.
Stability conditions and stability tax on failed banks' estates
The solution to the problem concerning the failed financial institutions' estates is twofold: stability conditions are introduced and a stability tax put in place. The stability conditions, which have been approved by the Ministerial Economics Committee and the Steering Committee for capital account liberalisation, are intended to prevent adverse effects stemming from distribution of capital. If the estates complete composition agreements by the end of 2015, they can obtain authorisation to transfer funds, provided that they fulfil the stability conditions; otherwise, they will be subjected to the stability tax. The intention is to simplify the rules currently applying to the execution of composition negotiations by means of a bill of legislation amending the Act on Financial Undertakings, no. 161/2002. The bill also includes provisions requiring that a financial institution's composition proposal (scheme of arrangements) be approved by a District Court Judge unless the Central Bank of Iceland has determined that it does not pose a threat to monetary, exchange rate, or financial stability.
A new bill of legislation on a stability tax imposes a one-off 39% tax on the total assets of the failed commercial or savings banks in accordance with their assessed value as of 31 December 2015. The tax is intended as to address the negative effects that would derive from full distribution of capital upon the conclusion of taxable entities' winding-up proceedings. After the tax has been paid, and upon fulfilling specified conditions, the taxable entities will be granted an exemption from the Foreign Exchange Act, no. 87/1992. Those entities that are currently in winding-up proceedings and conclude them with an approved composition agreement by 31 December 2015 will not be considered taxable entities.
Furthermore, amendments to the Foreign Exchange Act passed by Parliament yesterday evening are intended to reinforce the premises of the Government's capital account liberalisation measures and offset the risk created when foreign exchange transactions and capital transfers by certain parties are liberalised in stages.
Together, these bills of legislation form a comprehensive solution to the problem that settlement of the failed financial institutions' estates and distribution of capital to their creditors would create if no action were taken. It is estimated that Treasury revenues from the stability tax could total ISK 682 billion, after adjusting for authorised deductions. The unadjusted tax amounts to ISK 850 billion. The stability conditions solve the problem in roughly the same magnitude as the stability tax, but using a different methodology and approach.
The capital reverting to the State as a result of the stability conditions or stability tax must not have adverse effects on the money stock; furthermore, it must not have other expansionary effects that could undermine economic stability. This capital will be used to reduce Treasury debt as the opportunity arises, as the Treasury has borne substantial expense from the collapse of the financial system. When the settlement of the failed banks' estates and the liberalisation of capital controls are complete, major uncertainties concerning the Treasury's debt service burden will have been eliminated, and it is assumed that interest premia and interest expense will decline markedly.
Currency auction for holders of offshore ISK
The stock of offshore krónur creates a problem in connection with capital account liberalisation, as it consists of highly liquid foreign-owned ISK assets that would presumably have a strong impact on exchange rate stability if attempts were made to release them all at once. The offshore ISK problem is solved with currency auction and the sale of ISK- and EUR-denominated bonds with a maturity profile consistent with Iceland's balance of payments. Owners of offshore ISK can choose from among three options: currency auction, long-term Treasury bonds, or locked non-interest-bearing accounts. The auction process ensures that all offshore ISK will be brought under control. The offshore ISK owners that bid on foreign currency in exchange for their krónur will pay a premium for doing so, thereby bearing the necessary cost of releasing them from the confines of the capital controls.
Iceland in Continuing Consultations - Regarding Capital Control Liberalization:
Introduction from a Press Meeting on June 8th 2015.
May 20th 2016
The next steps in capital account liberalisation
This afternoon the Icelandic Minister of Finance and Economic Affairs, Bjarni Benediktsson, submitted before Parliament a bill of Law that sets forth the next steps towards liberalisation of capital controls in Iceland.
The bill is a part in the comprehensive capital account liberalisation strategy introduced by the Icelandic authorities in June 2015. The first step in that strategy was to solve the problem created by the failed financial institutions' estates, and that problem has now been solved in full.
In accordance with the authorities' action plan, the current phase addresses the problem created by the so-called offshore krónur. Offshore króna assets currently total over ISK 300 billion and are considered highly likely to seek an exit from the Icelandic economy with potentially negative consequences for the balance of payments and financial stability. Examples of such assets are deposits, funds held in custodial accounts, bonds, and bills. The offshore króna assets will continue to be subject to special restrictions, and the main objective of the bill of legislation is to segregate them more clearly and securely than is currently the case.
If the bill if passed into law, the Central Bank of Iceland aims to hold a foreign currency auction in which all owners of offshore krónur will be given the option of exchanging their offshore króna assets for euros.
Those offshore króna assets that are not used in the Central Bank auction will be subjected to the restrictions outlined in the bill of legislation.
For nearly eight years, the capital controls have put restrictions on risk diversification in resident investors' asset portfolios and have limited domestic firms' ability to participate in collaborative projects with non-residents and to seek investments abroad. The resulting economic complications grow greater over time.
This phase in the authorities' capital account liberalisation strategy paves the way for further steps, which will focus on households and businesses in Iceland.
- Bill of Legislation on the treatment of króna-denominated assets subject to special restrictions
- Q&A (1. Act on the treatment of króna-denominated assets subject to special restrictions 2. Central Bank of Iceland foreign currency auction)