- Central Bank of Iceland collateralised loans


The Central Bank of Iceland provides financial undertakings with facilities in
the form of collateralised loans, as do central banks in other countries. The
collateral provided by the financial undertakings concerned must meet the
conditions set forth in the Central Bank's Rules on Regular Facilities for
Financial Undertakings, which are similar to the rules set by other central
banks. Among the debt instruments that meet the requirements of the Rules are
Treasury instruments and financial undertakings' debt instruments that fulfil
defined minimum criteria, including credit rating criteria. 

As is the case with other central banks, the Central Bank of Iceland has
attempted, through its facilities, to facilitate the operations of domestic
financial undertakings during the financial crisis currently sweeping the
globe. To this end, the Central Bank followed the example of its counterparts
in other countries and increased its facilities, thereby incurring greater
risk; however, it expanded its facilities less than many other central banks
did. 

Following the insolvency of Iceland's three commercial banks, new banks were
established to handle domestic commercial banking activities, and domestic
deposit activity was transferred to these new banks. Consideration was also
given to transferring the liabilities due to securities pledged to the Central
Bank to the new banks, so as to provide support for continued domestic banking
activity. Upon closer scrutiny by the Financial Supervisory Authority and
Government leaders, in consultation with domestic and foreign legal advisors,
it was considered appropriate that all debt instruments issued by the previous
banks should remain in those banks for the time being, so as to guarantee
transparency and non-discrimination among creditors. At this point, it has not
been finally decided what will be done with the above-mentioned Central Bank
claims, nor is it clear whether - and how much - securities owned by the
Central Bank may decline in value. It is unlikely that the Central Bank will
emerge unscathed from the fall of the three banks, however, as such an outcome
would have been virtually inconceivable. The result will be known when the
committee appointed to assess the assets and liabilities of the new banks and
their predecessors has completed its work. This committee is composed of
foreign experts who will be assisted by Icelandic specialists as needed. This
arrangement ensures that the assessment will be carried out in an objective
manner, in accordance with the most rigorous professional standards. It is of
paramount importance that the outstanding claims be recovered insofar as is
possible so as to minimise the losses sustained by the banks' creditors.