Fifth meeting of the Financial Stability Council 2016
The fifth meeting of the Financial Stability Council in 2016 was held on Friday 16 December 2016 at the Ministry of Finance and Economic Affairs.
Financial system risk is broadly unchanged since the last meeting of the Financial Stability Council. Macroeconomic conditions have been broadly favourable for the financial system in the recent term. GDP growth remains robust, unemployment has fallen, households' disposable income has risen, and businesses have recorded good profits. Credit growth has been modest, and the terms offered to resident borrowers in foreign credit markets have improved. The external position of the Icelandic economy is more favourable than ever before and among the most positive in developed countries. On the other hand, there is growing tension in the labour market and the housing market, which could exacerbate risk in the future. The liberalisation of capital controls has proceeded smoothly, and withdrawals from deposit accounts have been very modest. The large commercial banks' position strengthened in the last quarter, and their resilience remains good in terms of both capital ratios and liquidity.
The following topics were on the agenda of the meeting: Quarterly assessment of countercyclical capital buffer, harmonisation of the Council's activities with the Official Policy on Financial Stability and the Act on Financial Undertakings, and approval of indicators for intermediate objective 1.
Since the Council's last meeting, cyclical systemic risk has increased somewhat, but not more rapidly than was assumed at the time of the last decision. The Financial Stability Council therefore recommends to the Financial Supervisory Authority that the countercyclical capital buffer be kept unchanged at 1.25%.
The main purpose of the countercyclical capital buffer is to increase the resilience of the financial system, thereby mitigating financial cycles. Releasing the buffer gives credit institutions the scope to lend money during a downward cycle, thereby mitigating the impact of shocks on the real economy. Financial cycles are generally long, with an average length of nearly sixteen years.  The pace of the build-up of the countercyclical capital buffer takes account of this, among other factors. It can be expected that the Financial Stability Council will recommend in the coming term that the countercyclical capital buffer be increased further, in line with developments in the financial cycle.
At its meeting on 14 April 2015, the Financial Stability Council approved three core indicators for intermediate objective 1. One of these indicators, the credit-to-GDP ratio, has been published in two ways: growth in the credit-to-GDP ratio and the deviation of the ratio from its long-term trend (the credit-to-GDP gap). Therefore, there are actually four indicators that have been considered. At its meeting last Friday, the Council agreed to use credit intensity instead of growth in the credit-to-GDP ratio, and to add a new indicator – growth in the price- and exchange rate-adjusted debt stock – for the same intermediate objective.
It was decided that, prior to the Council's next meeting, the Systemic Risk Committee would assess how the Council could best conduct regular information disclosure on which indicators it takes into particular consideration in analysing systemic risk, cf. the Official Policy on Financial Stability, and how to make recommendations on the countercyclical capital buffer when it has been decided to keep the buffer unchanged with reference to Article 86(d) of the Act on Financial Undertakings, no. 161/2002.
The Financial Stability Council's meetings in 2017 are scheduled for 6 April, 10 June, 6 October, and 19 December.
 See, for example, Drehmann, M., C. Borio, and K. Tsatsaronis. Characterising the financial cycle: don't lose sight of the medium term! BIS Working Paper no. 380, June 2012, and Bjarni G. Einarsson et al. The long history of financial boom-bust cycles in Iceland. Part II: Financial cycles. Working Paper, no. 72. Central Bank of Iceland, August 2016.