Arion Bank recalculates FX denominated loans

Arion Bank has concluded from recent rulings of the Icelandic Supreme Court that a certain portion of Arion Bank’s loan book is made up of currency indexed ISK loans which are in part illegal according to Icelandic laws.

Even though no foreign currency indexed ISK loans made by Arion Bank have been deemed illegal by the Supreme Court, the Bank has decided that recent rulings made by the Supreme Court provide a precedent for Arion bank to follow. The loans that fall under the conditions set forth by the Supreme Court in its rulings will be recalculated into ISK denominated loans. The Bank estimates that around 2,000 loans, to both individuals and businesses, will have to be recalculated.

The recalculation now comes in addition to the recalculation of foreign currency indexed ISK mortgage loans which was done earlier this year. Therefore, the lion’s share of foreign currency indexed ISK loans to individuals have been or will be recalculated into ISK denominated loans. In the case of businesses it is important to point out that in the summer of 2010 the legality of Arion Bank’s FX loans to businesses was assessed by a team of experts at the Bank based on FME guidelines. They concluded that the legality of some FX loans to companies was beyond doubt, while others were more vulnerable, as the recent rulings of the Supreme Court have confirmed.

It is clear that the recalculation now will affect Arion Bank financially. Nevertheless, after taking into account the reduced risk from these loans and the reduction in foreign currency imbalance, the capital ratio of Arion Bank will remain well above the stringent 16% requirement of the FME.