CBI and FME announce new Iceland foreign currency loan interest rules

The Financial Supervisory Authority and the Central Bank of Iceland have decided to issue guidelines to financial institutions due to non-binding clauses linking loans to the exchange rate. They will then present these guidelines at a joint press conference. The guidelines are as follows:

(Central Bank of Iceland press release)

Guidelines issued by the Financial Supervisory Authority and the Central Bank of Iceland to financial undertakings due to non-binding clauses linking loans to the exchange rate

On 16 June 2010, the Supreme Court of Iceland handed down two decisions pertaining to the legality of linking loan obligations in Icelandic krónur to the exchange rate of foreign currencies; cf. Cases no. 92/2010 and 153/2010 begin_of_the_skype_highlighting 153/2010 end_of_the_skype_highlighting. The Court concluded that such exchange rate linking was non-binding.

Until a final conclusion has been reached concerning the scope and terms of the loan agreements affected by these Supreme Court judgments, it is especially important to gather reliable information, create stability in financial market transactions, and promote a secure and effective financial system.

The Financial Supervisory Authority and the Central Bank of Iceland therefore direct the following guidelines to financial undertakings:

1. Loan agreements that, in the opinion of the financial institution concerned, contain non-binding exchange rate linkage clauses (cf. the above-cited Supreme Court judgments) shall be recalculated. Instead of linking the loan agreements to foreign exchange rates and interest rates, the institutions shall calculate the loans based on interest rates determined by the Central Bank of Iceland, with reference to the lowest interest rate on new, general, non-indexed or indexed loans from credit institutions, which rates shall be used in cases of uncertainty about loan terms – cf. Articles 4 and 18 of the Act on Interest and Price Indexation, no. 38/2001 – unless the parties agree otherwise.

2. Loans shall be treated based on the aforementioned premises as soon as is practicable. If, for technical reasons, a financial institution cannot comply with these guidelines immediately, it shall ensure that payment amounts are aligned with the above guidelines as closely as possible, and that they are fully in compliance with the guidelines no later than 1 September 2010.

3. Financial institutions shall re-assess their economic capital in view of these conditions and shall ensure that it is sufficient to cover potential asset erosion over and above that which derives from Item 1 above.

4. Reporting to the Financial Supervisory Authority and the Central Bank of Iceland on foreign exchange balance, liquidity, and capital adequacy shall be based on the above-specified premises.

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