The Financial Supervisory Authority of the Central Bank of Iceland (FSA Iceland) assesses key risks in financial institutions’ operations through the so-called supervisory review and evaluation process (SREP). The SREP assessment takes place according to provisions in the Act on Financial Undertakings, No 161/2002. For Iceland’s three systemically important banks – Arion Bank hf., Íslandsbanki hf., and Landsbankinn hf. – the assessment is undertaken each year, while for other institutions it is carried out every two to three years.
The SREP assessment for the three systemically important banks had already begun in March, when the COVID-19 pandemic reached Iceland. The pandemic and the various public health measures that have been necessary in Iceland have changed the operational conditions of banks and many other financial institutions. Furthermore, economic uncertainty has increased substantially, making it unusually difficult to determine asset quality and assess other risks in the banks’ operations for the time being.
In its 8 April 2020 statement, the Financial Supervision Committee says the following about the SREP: “Systemically important banks are currently conducting their annual supervisory review and evaluation process (SREP). In view of the ongoing difficulties, final decisions on capital requirements will presumably be made based on financial statements later this year rather than as of year-end 2019. Furthermore, no conventional stress test will be conducted at this time in connection with SREP.”
The Financial Supervision Committee has now decided that the results of the 2019 SREP assessment concerning additional capital requirements (Pillar II-R) shall remain unchanged. Developments in key risks in the banks’ operations will be monitored closely in coming months. The additional capital requirement will be reviewed if need be, but no later than during the 2021 SREP.
In addition to the determination of the need for additional capital, the SREP entails a review of factors such as the viability and sustainability of the business model, internal governance, operational risk and management and control of credit risk, concentration risk, market risk and interest rate risk in the banking book, and liquidity and funding risk. Even though it has now been decided that the additional capital requirement will remain unchanged, comments and requests for improvement with regard to the above-listed factors will be communicated to the banks as the need arises.
The next regular SREP assessment for the systemically important banks is set to begin late this year.