Lánamál ríkisins - Company Announcement

New policy instrument to temper and affect the composition of capital inflows

The Central Bank of Iceland has published the Rules on Special Reserve
Requirements for New Foreign Currency Inflows in accordance with the new
Temporary Provision of the Foreign Exchange Act, no. 87/1992. The main purpose
of the Temporary Provision is to provide the Central Bank of Iceland with a new
policy instrument, generally referred to as a capital flow management measure,
to temper inflows of foreign currency and to affect the composition of such
inflows. It is therefore intended to reduce the risk that could accompany
excessive capital inflows under the current regulatory framework for foreign
exchange, support other aspects of domestic economic policy, and contribute to
macroeconomic and financial stability. 

The Central Bank’s capital flow management tool is based on the application of
special reserve requirements for new inflows of foreign currency, in accordance
with rules set by the Bank on the basis of the Foreign Exchange Act. The
capital flow management measure is structured so as to reduce the risk
potentially accompanying strong capital inflows by directly affecting the
incentives for carry trade. The tool is therefore intended, among other things,
to support effective monetary policy transmission. Furthermore, the structure
is intended to ensure that the measure is flexible, effective, and efficient in
implementation so as to make it possible to respond quickly to changed
circumstances. 

The Rules contain provisions on the implementation of special reserve
requirements for new foreign currency inflows, including the special reserve
base, holding period, special reserve ratio, settlement currency, and interest
rates on deposit institutions’ capital flow accounts with the Central Bank of
Iceland. The special reserve base is defined as new inflows of foreign currency
in connection with specified types of capital, particularly to include new
investment in electronically registered bonds and bills, and deposits. In
addition, new inflows related to loans taken for investment in such instruments
can create the special reserve base. Further details regarding the special
reserve base are provided in the Rules. The Foreign Exchange Act states that
the holding period may range up to five years and that the special reserve
ratio may range up to 75%; however, the Rules set the holding period at one
year and the special reserve ratio at 40%. The Rules also set the interest rate
on capital flow accounts with the Central Bank of Iceland at 0% and specify the
Icelandic króna as the settlement currency.

Attachments:

Rules on special reserve requirements for new foreign currency inflows - 4 June 2016.pdf