Arnór Sighvatsson: Guidelines issued to financial institutions due to non-binding clauses linking loans to the exchange rate Introduction by Mr Arnór Sighvatsson, Deputy Governor of the Central Bank of Iceland, about guidelines issued to financial institutions due to non-binding clauses linking loans to the exchange rate, Reykjavík, 1 July 2010. *  *  *  This morning the Central Bank and the Financial Supervisory Authority issued guidelines to financial undertakings in order to instruct them on how to respond to the Supreme Court judgement on non-binding exchange rate linkage clauses. With these guidelines, the supervisory bodies concerned declare that their unequivocal understanding of the situation resulting from this Supreme Court decision is that, in cases involving loan agreements that have been ruled unlawful, the settlement and repayment of those agreements shall take account of Articles 4 and 18 of the Act on Interest and Price Indexation, no. 38/2001, unless the parties agree otherwise. The guidelines are intended to create stability in financial market transactions and promote a secure and effective financial system. The Financial Supervisory Authority and the Central Bank are required by law to ensure financial system stability, which is a matter of vital public interest. With the issuance of the present guidelines, these institutions are acting in accordance with the legal obligation resting on them.
Access to foreign credit is a prerequisite for export-driven growth. Moreover, deterioration in the banks’ position would adversely affect terms in the domestic credit market. Lending rates could rise and deposit rates could decline, impeding investment and delaying economic recovery. As soon as confidence in the Treasury and the financial system erodes, Iceland’s currency will suffer as well. In that instance, we would not be able to lift the capital controls as planned, after the Third Review of the IMF programme. Furthermore, the financial system would be poorly equipped to tolerate possible instability associated with capital account liberalisation. Finally, it is appropriate to bear in mind that financial undertakings’ scope to meet the needs of other individuals and firms would be drastically reduced. All of these factors show how vital it is to the public interest that the Central Bank and the Financial Supervisory Authority set forth general guidelines so as to maintain stability while matters of legal uncertainty are being settled. Other authorities and the legislature must also assess whether further measures must be adopted in order to remove all doubt. Ensuring stability is in our hands – all of our hands. We hope and expect that all parties will work together to achieve that goal. 2  BIS Review 91/2010