ICELAND - The four largest commercial banks in Iceland have all passed the regular "stress test" of the Icelandic Financial Supervisory Authority (FME), which calculates the ability of institutions to withstand "considerable" financial shocks.

Kaupthing Banki, Landsbanki, Glitnir Banki, and Straumur-Burdarás were all stress-tested with simultaneous 'shocks', that could in theory affect the value of shares, market bonds, appropriated assets non-performing/impaired loans, and the Icelandic Króna, to see if they could withstand the changes without their capital adequacy ratio falling below 8%.

The test, carried out by the FME at the end of the second quarter, showed the stress test affected Kaupthings ratio by 0.4%, reducing it from 11.2% to 10.6%, while Landsbanki's capital ratio dropped 0.9% under the test from 10.3% to 9.4%.

Glitnir Banki had the best result with an affect of just 0.4% on its ratio, which moved from 11.2% to 10.8%, while Strumur-Burdarás saw its capital ratio fall 4% from 25.4% to 21.5%, although the bank's capital ratio was based on currency risk in relation to the euro.

The FME pointed out the capital ratios of the banks at the end of the second quarter before the stress test reflected the recent turbulence in the financial markets in the second half of 2007 and the first half of the year 2008, and confirmed the authority conducts various stress tests "as deemed necessary" in each case.

Jónas Fr. Jónsson, the director general of the FME, said: "The results from the stress-test indicates the capital ratios of the banks are solid and can withstand considerable financial shocks."

However, he warned shareholders and management of the banks "need to focus on maintaining strong capital and even increase it, as capital levels need constantly to be reviewed in light of different risk factors in the operations of each company".

The results of the stress test follow a period of financial uncertainty in the Icelandic market following dramatic falls in the strength of the Icelandic Króna at the end of the first and second quarters, which led the Central Bank of Iceland to gather data amid suspicions of a possible financial attack on the Icelandic financial system.

In the last monetary policy statement, the Central Bank of Iceland decided to hold interest rates at 15.5%, as inflation rose "sharply" following the depreciation of the króna in the first half of the year to exceed the bank's previous forecasts.

That statement admitted Iceland is also facing a "considerable contraction in GDP" over the next two years, and said "in the coming months it will be important to enhance confidence in the economy and effective market functioning".

It claimed Iceland's commercial banks play an important role in maintaining confidence in the financial system, and warned "under the current global financial market conditions, they must protect their liquidity and their capital position, seek all possible ways to reduce their need for foreign credit, and adapt the scope of their operations to dramatically changed circumstances".

At the July press conference,  following concerns  banks may have played a role in the steep decline of the króna after reporting significant exchange rate gains at the end of the first quarter, Davíd Oddsson, chairman of the bank's board of governors, admitted it was "interesting that this should happen".

However, he pointed out there "could be a number of explanations", and confirmed the central bank had not carried out "any special appraisal of the matter" and added there is "not necessarily" any reason to consider one in the future.

He said: "The banks are in a very difficult position, and we must not forget that it's about a year since the global credit crisis began - and there was speculation at the time that the Icelandic banks would not be able to bear the strain as well as some others. But they've managed better than expected."

"We must all adapt to these dramatically changed circumstances. With that announcement, we aren't insinuating that the banks are not doing this. But the banks themselves must bear the brunt of solving this problem, and they are fully aware of this," added Oddsson.

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