REYKJAVIK, Sept 17 (Reuters) - The Icelandic government said on Friday it did not expect to have to inject the North Atlantic island nation's banks with fresh capital in the wake a supreme court ruling on foreign currency loans this week.
Iceland's top court ruled on Thursday that banks should use domestic interest rates when calculating charges on foreign currency loan, easing worries the government would again have to recapitalise the island's banks, which collapsed in 2008.
"Even though the banks will face some short-term costs, the deposit-taking institutions are all highly capitalised," Icelandic Minister of Economic Affairs Arni Pall Arnason said.
"The financial supervisor is, moreover expected to lower its capital requirement ratio as risks related to foreign currency lending are reduced. The government therefore expects the needs for capitalisation in the current circumstances to be negligible if any," he told Reuters.
The status of the 186 billion Icelandic crowns in foreign currency loans owed by the crisis-hit country's households was cast in doubt after the Supreme Court in June declared the loans had been illegally linked to foreign currencies.
But the June ruling did not say what rates of interest should be used for such loans. On Thursday, it ruled that Icelandic interest rates should be used.
The government had been worried that if lower, foreign interest rates had been allowed then the state might have had to spend substantial sums on recapitalising the bank sector, much of which is in state hands after the top three banks collapsed nearly two years ago.
Iceland's financial watchdog told Reuters the legislation resulting from the court ruling was expected to generate a cost of about 50 billion Iceland crown ($428 million) or less for the country's banks.
"It is a relatively mild blow to the banks and they will be able to withstand it," said Gunnar Andersen, director general of the Financial Supervisory Authority.
The court ruling this week will not affect corporate foreign-denominated loans which stand at 841 billion Icelandic crowns of which 256 billion are owed by companies in the fishing sector, the islands main industry.
(Reporting by Birna Osk Bjornsdottir; writing by Niklas Pollard)