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Iceland to Apply New Rules Before Capital Controls Are Removed

Iceland will apply “prudential rules” to reduce risks associated with unrestricted capital movements before the government removes capital controls blocking as much as $8 billion from leaving the economy, the central bank said.

“The pertinent ministries, the central bank, and the Financial Supervisory Authority will begin to formulate such rules in their final form, including proposing legislative amendments where appropriate,” Reykjavik-based Sedlabanki said in a statement on its website. The suggested rules “should limit foreign exchange risk in the financial system, as well as limiting foreign currency liquidity risk; furthermore, they will, in combination, limit the banks’ potential for excessive growth.”

Sedlabanki wants parliament to impose a financial tax that limits capital movements and reserve requirements on foreign financing. The central bank also called for rules to curb liquidity risk with financial institutions’ foreign-currency denominated balance sheets, and for regulations that limit on Icelandic lenders’ ability to accept deposits from other countries.

Iceland, whose banks defaulted on $85 billion in 2008, completed a 33-month International Monetary Fund program in August last year. The island’s approach to its rescue has led to a “surprisingly” strong recovery, Daria V. Zakharova, the IMF’s mission chief to the country said in an interview this month. Fitch Ratings in February raised the island to investment grade, praising its “unorthodox crisis policy.”

The country imposed capital controls in 2008 after the krona plunged as much as 80 percent against the euro offshore. The controls blocked as much as $8 billion in kronur assets from leaving the economy, according to Arion Bank hf. Iceland’s $13 billion economy will expand 2.4 percent this year, the IMF said April 17. That compares with a 0.3 percent contraction in the 17-member euro area, the fund said.

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