New Supreme Court ruling on illegal loans in foreign currencies

  • Significant uncertainty remains on how the ruling should be interpreted
  • Total capital ratio will remain above the minimum requirement of 16% set by Icelandic FSA
  • Only ISK CPI-linked mortgages in underlying covered bond pool listed on NASDAQ OMX Iceland

On 15 February 2012, the Supreme Court in Iceland passed a ruling (No.600/2011) that affects how banks in Iceland have recalculated loans that are illegally linked to the value of foreign currencies. Further, the ruling states that Act 151/2010, that the Icelandic Parliament Althingi passed in December 2010 and instructed banks to recalculate FX-linked home mortgages and how that should be done, violates the provisions of the Icelandic constitution that protects the freedom to hold property, as the legislator cannot pass law that retroactively changes the rules on repayment of claims without adequate compensation.

Significant uncertainty remains on how the ruling should be interpreted and Íslandsbanki is seeking legal counsel in that regard. The Bank will keep its customers and stakeholders well informed when that review has been concluded.

Íslandsbanki's total capital ratio is strong. Given the most unfavourable outcome of the ruling’s effect, Íslandsbanki’s capital ratio would still remain above the minimum requirement of 16% set by the Icelandic Financial Services Authority.

As Íslandsbanki has listed covered bonds on the NASDAQ OMX Iceland, the Bank would like to highlight that the ruling won’t affect the underlying covered bond pool as it consists only of ISK CPI-linked mortgage loans. Furthermore, the cover pool must withstand a weekly stress test and is regulated by the Icelandic Financial Supervisory Authority which additionally appoints an independent inspector to monitor the issue.

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