A report prepared by Jakob R. Moller of MALFLUTNINGSSKIRFSTOFA -Counsel Office - Petur Guthmundarson, Hakon Arnason, Jakob R. Moller, Einar Baldvin Axelsson, Gunnar Sturluson


Regulatory environment

Banking in Iceland is given a legal framework in the Act on Commercial Banks and Savings Banks no. 113 of 12 July 1996. Supervision is exercised by the Central Bank´s Bank Inspectorate in accordance with provisions in the Central Bank Act of 1986.

Banking law in Iceland has in recent years been brought into line with Directives applicable in the European Union (EU) after Iceland became a founding member of the European Economic Area (EEA) on 1 January 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 12 May no. 50/1997, the state-owned banks were incorporated as limited liability companies, effective as of 1 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, i.e. 1 January 1998 and The Treasury´s liability continues in full force until the relevant obligation is fulfilled. For obligations incurred by the banks, i.e. Landsbanki Íslands hf. and Bunatharbanki Íslands hf., after 1 January 1998, the usual law regarding liabilities of limited liability companies applies, i. e. The Act on Public Limited Liability Companies no. 2/1995. As the shareholder the Minister of Commerce appoints the Board of Directors. After the incorporation the share capital of Landsbanki Íslands hf. is app. USD 77.5 million, the share capital of Bunatharbanki Íslands hf. after incorporation is app. USD 49.3 million.

In April 1998 there was a major organizational change at Landsbanki Íslands hf. when one Managing Director was appointed in place of the three previous Managing Directors who had constituted the Bank´s Managing Board.

Size of the banking system

At the end of 1996 there were in operation 4 commercial banks, thereof 2 stateowned, 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 265.000. The rate of exchange of the Icelandic krona (ISK) against the US dollar is 1USD=71 ISK on 13 May 1998.

The assets on the balance sheets of commercial banks at the end of 1996 totalled ISK 253.4 billions (i.e. 3.57 billion USD) and in the savings banks ISK 58.2 billions. The commercial banks reported a profit in 1996 of ISK 1.34 billions while the savings banks reported a profit of ISK 640 millions. The whole banking system reported a net return on equity (ROE) of 8.2% which showed the continued improvement in the banks´ financial condition.

The capital ratios of both commercial and savings banks meet the minimum requirements, i.e. were on average 10.7% for the commercial and savings banks, and between 9.3 % and 10.2% for the commercial banks alone.

Regulatory agencies

Under the Central Bank of Iceland Act of 1986, Chapter IV, it is incumbent upon the Central Bank to inspect and supervise the activities of deposit taking institutions. This activity is carried out by a separate department of the Central Bank, reporting to the Governors and Board of Directors of the Central Bank.

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 Bank Inspectorate


Capital adequacy

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


Under the Act on Commercial 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 institution 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.


Non-bank financial institutions.

The Act on Credit Institutions other than Commercial Banks and Savings Banks was enacted in 1993. It governs the activities of such institutions, prominent among which are the so-called loan funds of the diverse industries.

Non-bank financial institutions are subject to exactly the same rules on capital ratios, audits, inspections, dissolution and mergers as banks.

In 1997 four state-owned investment credit funds were merged and incorporated into the Industrial Investment Bank Ltd. with share capital of app. USD 95 million.

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 Bank Inspectorate receives an announcement to this effect from the competent authorities in their home countries.

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

1. A description of the activities of the branch, its structure and proposed activities in Iceland,
2. confirmation that the proposed activities are permitted in the home country,
3. the address of the branch,
4. the names of the managers of the branch,
5. the amount of own funds and the solvency ratio of the bank, and
6. 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 European Economic Area and which have received operating licences from the competent authorities in those countries, may provide services in Iceland without establishing branches, after the Bank Inspectorate 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 licenses in Iceland on similar conditions.

The content of this article is intended to provide only general information on the subject. Legal advice should be sought for your specific circumstances.