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COPENHAGEN, Oct 12 (Reuters) - Icelandic banks, recovering from a 2008 financial crisis, face tighter capital requirements to withstand any future downturns even as the country's economy improves, the central bank said Wednesday.
Iceland is in the process of re-joining the international financial community, as it slowly lifts capital controls imposed following the crisis, which led to the default of three banks.
"Under the current favourable external conditions, it is essential that financial institutions preserve their resilience so that they will be able to weather economic headwinds later without significant disruption of their activities," the central bank said in its Financial Stability report.
Icelandic banks have reduced their credit risks and increased liquidity ratios. Last month, Moody's credit rating agency upgraded Iceland's government ratings to A3 with a stable outlook.
The so-called countercyclical capital buffer should be increased by a further 25 basis points to 1.25 percent, the central bank report said.
Central banks raise the countercyclical buffer if they think lending conditions are getting too buoyant, forcing banks to build up their capital reserves to prepare for any possible downturn.
Iceland's Financial Supervisory Authority had received a recommendation to increase the buffer and intends to follow it, a spokesman told Reuters on Wednesday.
The initial capital buffer rules will enter into force in March next year and the additional 25 basis points will be added in November, 2017, he said.
Propelled by borrowed money, Iceland's banking sector grew rapidly leading up to the financial crisis of 2008, but defaulted when the United States and the EU tightened credit.
In August, the central bank cut its key deposit interest rate by 50 basis points to 5.25 percent, signalling a normalization of the economy. (Reporting by Nikolaj Skydsgaard; editing by Jacob Gronholt-Pedersen and Susan Thomas)