Fourth meeting of the Financial Stability Council 2016


The fourth meeting of the Financial Stability Council in 2016 was held on Friday 30 September at the Ministry of Finance and Economic Affairs. Macroeconomic conditions have been broadly favourable for the financial system in the recent term. GDP growth has been robust, unemployment has fallen, households' disposable income has risen rapidly, and businesses have recorded good profits. To a large extent, households and businesses have used this favourable situation to reduce debt and improve their equity position. Credit growth has been modest at the same time as resident entities have gained readier access to foreign credit markets. In spite of rapid growth in demand, the current account surplus has remained sizeable and inflation has remained low. The external position of the economy is very good overall, and the foreign exchange reserves are more than adequate to support capital account liberalisation. Risk in the financial system has diminished somewhat in this positive environment. On the other hand, there is growing tension in certain markets, particularly the labour market and the housing market, which could exacerbate risk in the future. In addition, there is some risk attached to the forthcoming liberalisation of the capital controls; however, the banks are quite resilient against potential shocks, their capital ratios are high, and their liquidity position is strong.

The following topics were on the agenda of the meeting:

Quarterly assessment of the countercyclical capital buffer.

The assessment of financial system risks gives cause to increase the countercyclical capital buffer by 0.25 percentage points. The Council sent its recommendation to the Financial Supervisory Authority after the meeting, and the new countercyclical capital buffer of 1.25% will take effect twelve months after the Financial Supervisory Authority's decision on it. The main purpose of the countercyclical capital buffer is to increase the resilience of the financial system, thereby mitigating impact of the downward phase of the financial cycle. Lifting the buffer gives credit institutions the scope to maintain the flow of credit during the downward phase, thereby mitigating the impact of shocks on the real economy. It is therefore important to finish building up the buffer before the downward phase begins and the need to lift the buffer increases. The Financial Stability Council can be expected to recommend that the build-up of the countercyclical capital buffer continue in line with the upward financial cycle.

The Financial Stability Council's next meeting will be held on 16 December 2016.