Iceland - Banking and securities

In March 1961, the Central Bank of Iceland was founded to issue notes and assume other central bank functions previously exercised by the National Bank of Iceland, a wholly state-owned bank established in 1885. Other banks are the Agricultural Bank, a state bank founded in 1929; the Fisheries Bank, a private joint-stock bank founded in 1930, with most of its shares held by the government; the Industrial Bank, a joint-stock bank established in 1953, with part of the shares owned by the government; the Iceland Bank of Commerce, founded in 1961; the Cooperative Bank of Iceland, founded in 1963; and the People's Bank, founded in 1971. All banks have main offices in Reykjavík, and some have branches in other towns. Savings banks are distributed throughout the country.

In 1955, Iceland took the first step toward indexation of financial assets. The Economic Management Act of 1979 established a system of full indexation of savings and credit, most provisions of which were gradually implemented over the next two years. Most deposits are now indexed, and legislation that took effect in November 1986 gave banks increased power to determine their interest rate.

In 1990 the number of commercial banks in Iceland were reduced from seven to four. A number of banks were forced to merge into the Islandbanki because of financial trouble. In 1997 there were four commercial banks, two of which, the Landsbanki and Bunadar banki, are still state-owned. The country's two other banks, Islandsbanki and Sparisjodabanki, are privately-owned.

The whole basis on which the financial system is supervised and regulated, however, has been transformed by Iceland's accession to the European Economic Area (EEA) in 1994. Under the agreement, Iceland has been required to implement into national law the common minimum standards for the supervision of financial institutions-banks, insurance companies, and securities firms-developed at EU level.

Since 15 June 1973, the market rate of the Icelandic króna has been floating vis-à-vis other currencies. A currency reform that took effect on 1 January 1981 introduced a new króna equivalent to 100 old krónur. The money supply, as measured by M2, totaled K 135,353 million in 1995. The International Monetary Fund reports that in 1998, currency and demand deposits—an aggregate commonly known as M1—were equal to $820.5 million. In that same year, M2—an aggregate equal to M1 plus savings deposits, small time deposits, and money market mutual funds—was $3.2 billion. The money market rate, the rate at which financial institutions lend to one another in the short term, was 8.12%. The discount rate, the interest rate at which the central bank lends to financial institutions in the short term, was 8.5%.

The Securities Exchange of Iceland (SEI) was established in 1985 on the basis of rules set by the Central Bank. A new Act on the Icelandic Stock Exchange was passed in February 1993, granting a monopoly to the exchange. As of 1998, 67 companies were listed on the stock exchange.

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