{
  "title": "Iceland: Financial Sector Assessment Program—Technical Note on Stress Testing and Systemic Risk Analysis",
  "publication": "IMF Staff Country Reports, July 28, 2023",
  "sourceUrl": "https://www.imf.org/en/publications/cr/issues/2023/07/26/iceland-financial-sector-assessment-program-technical-note-on-stress-testing-and-systemic-537013",
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  "summary": "This technical note on Iceland focuses on Stress Testing and Systemic Risk Analysis. The Financial Sector Assessment Program took place against the background of a strengthened financial sector in Iceland amid heightened uncertainty in the global economy.",
  "sections": [
    {
      "heading": "Overview",
      "content": "- Focus: Stress Testing and Systemic Risk Analysis for Iceland.\n- Context: Assessment conducted against a background of a strengthened financial sector in Iceland amid heightened uncertainty in the global economy.\n- Structural change: The Icelandic financial landscape has undergone significant structural transformation since the global financial crisis with a contracted banking sector.\n- Main vulnerability identified: Foreign exchange (FX) funding remains a vulnerability despite overall soundness of the banking sector."
    },
    {
      "heading": "Key findings from stress testing",
      "content": "- Scenario-based bank solvency stress test:\n  - Confirmed the sector’s resilience to severe but plausible macro-financial shocks, with gross domestic product influence similar to the Global Financial Crisis.\n  - The adverse scenario produced a significant impact on bank capital ratios, but no bank saw its capital ratios falling below the hurdle rates.\n  - Resilience attributed to high initial capital positions and adequate pre-provision income.\n- Liquidity Coverage Ratio (LCR)-based stress test:\n  - Suggests the banking system on aggregate is broadly resilient to adverse liquidity conditions.\n  - Not immune to additional liquidity outflows from pension and nonresident FX funding."
    },
    {
      "heading": "Vulnerabilities and transmission channels",
      "content": "- FX funding:\n  - Identified as a persistent vulnerability for the banking sector.\n  - Potential channel for liquidity stress, particularly through nonresident FX funding.\n- Pension sector:\n  - Additional liquidity outflows from pension funds could materially affect bank liquidity positions.\n- Capital and income buffers:\n  - High initial capital positions and adequate pre-provision income provided significant resilience under the adverse scenario."
    },
    {
      "heading": "Policy implications and recommendations (implied by findings)",
      "content": "- Maintain strong capital positions and monitor pre-provision income to preserve solvency buffers under severe shocks.\n- Strengthen monitoring and management of FX funding exposures to mitigate liquidity risks stemming from nonresident FX funding.\n- Assess and plan for potential liquidity linkages with the pension sector to prevent adverse spillovers to bank liquidity.\n- Continue regular scenario-based stress testing (solvency and liquidity) to evaluate resilience against severe but plausible macro-financial shocks."
    },
    {
      "heading": "Publication and metadata",
      "content": "- Publication title: Iceland: Financial Sector Assessment Program-Technical Note on Stress Testing and Systemic Risk Analysis\n- Publication date: July 28, 2023\n- Pages: 119\n- Volume: 2023\n- Issue: 276\n- Series: Country Report No. 2023/276\n- DOI: https://doi.org/10.5089/9798400251306.002\n- Stock No: 1ISLEA2023003\n- ISBN: 9798400251306\n- ISSN: 1934-7685\n- Subjects: Asset and liability management, Commercial banks, Expenditure, Financial institutions, Financial sector policy and analysis, Foreign exchange, International organization, Liquidity, Monetary policy, Pension spending, Stress testing\n- Keywords: bank asset composition, bank liquidity position, Bank-NBFI network, Commercial banks, Europe, fair value, Global, interest rate projection, Liquidity, Pension spending, sensitivity analysis, stress test, Stress testing, Tier 1, top-down solvency stress test\n\nIMF Staff Country Reports 2023/276 (July 28, 2023), 119 pages, DOI: https://doi.org/10.5089/9798400251306.002\n\n---\n\n Content in this bundle\n\n- Executive Summary\n  - Executive Summary (Markdown version){rel=\"alternate\" type=\"text/markdown\"}\n  - Executive Summary (PDF){rel=\"external\" type=\"application/pdf\"}"
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    "Published: July 28, 2023",
    "Series: IMF Staff Country Reports",
    "DOI: https://doi.org/10.5089/9798400251306.002",
    "Focus: Stress Testing and Systemic Risk Analysis for Iceland.",
    "Context: Assessment conducted against a background of a strengthened financial sector in Iceland amid heightened uncertainty in the global economy.",
    "Structural change: The Icelandic financial landscape has undergone significant structural transformation since the global financial crisis with a contracted banking sector.",
    "Main vulnerability identified: Foreign exchange (FX) funding remains a vulnerability despite overall soundness of the banking sector.",
    "Scenario-based bank solvency stress test:",
    "FX funding:",
    "Pension sector:",
    "Capital and income buffers:",
    "Maintain strong capital positions and monitor pre-provision income to preserve solvency buffers under severe shocks.",
    "Strengthen monitoring and management of FX funding exposures to mitigate liquidity risks stemming from nonresident FX funding.",
    "Assess and plan for potential liquidity linkages with the pension sector to prevent adverse spillovers to bank liquidity.",
    "Continue regular scenario-based stress testing (solvency and liquidity) to evaluate resilience against severe but plausible macro-financial shocks.",
    "Publication title: Iceland: Financial Sector Assessment Program-Technical Note on Stress Testing and Systemic Risk Analysis",
    "Publication date: July 28, 2023",
    "Pages: 119",
    "Volume: 2023",
    "Issue: 276",
    "Series: Country Report No. 2023/276",
    "DOI: https://doi.org/10.5089/9798400251306.002",
    "Stock No: 1ISLEA2023003",
    "ISBN: 9798400251306",
    "ISSN: 1934-7685",
    "Subjects: Asset and liability management, Commercial banks, Expenditure, Financial institutions, Financial sector policy and analysis, Foreign exchange, International organization, Liquidity, Monetary policy, Pension spending, Stress testing",
    "Keywords: bank asset composition, bank liquidity position, Bank-NBFI network, Commercial banks, Europe, fair value, Global, interest rate projection, Liquidity, Pension spending, sensitivity analysis, stress test, Stress testing, Tier 1, top-down solvency stress test",
    "**Executive Summary**"
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