Central Bank measures and Government responses to the pandemic have strongly supported households and businesses. Purchasing power has been safeguarded. Unemployment has soared, however, reaching 11.5% in February, as compared with 5% a year earlier. Job numbers have fallen in nearly all sectors, albeit most in tourism and other sectors whose activities have been restricted by public health measures. Unemployment is expected to remain high as long as the pandemic is ongoing.

International flights are still subject to heavy restrictions. Tourism company revenues have been negligible for well over a year. Increasing vaccination rates give cause for greater optimism, but as yet there is no end in sight to difficulties in the sector. Tourism companies’ debt has increased markedly in the past twelve months, largely because of deferred interest and instalment payments, together with new support loans and bridge loans. At the end of 2020, lending to the tourism industry accounted for 10% of the three large banks’ customer loans. If the situation does not improve, tourism operators’ liquidity problems could easily develop into solvency problems for much of the sector.

The impact of the pandemic on financial institutions’ balance sheets shows primarily in increased impairment and arrears and a larger share of frozen loans. In 2020, financial institutions offered temporary moratoria that, at one point, applied to one-fifth of corporate loans. After moratoria expire, loans are frozen if necessary. At the end of February, just under 17% of corporate loans were frozen, up from 3.5% a year earlier. The vast majority of frozen loans were to companies in tourism and other services.

Interest rate cuts have livened up the real estate market. Housing market turnover in greater Reykjavík was up 42% year-on-year in H2/2020, and the number of purchase contracts rose 32%. In the first two months of 2021, turnover had doubled year-on-year. Despite the surge, house prices have risen relatively modestly. In February, real prices were up 3.1% year-onyear. A record number of new flats were put on the market in 2020, but new construction has declined sharply since then.

Even though the banks were under significant pressure in 2020, owing to increased impairment and narrower interest rate spreads, their profits were somewhat higher than in 2019. Their balance sheets have grown, as can be seen in an increase in interest-bearing assets, which supports their interest income despite narrower spreads. Streamlining efforts lowered operating expenses by nearly 10% in real terms in 2020. The banks’ expense ratio fell below 50% for the first time since 2015.

The Central Bank’s responses to the pandemic have supported the banks’ liquidity. At the end of February, their liquidity in excess of the Bank’s required minimum totalled 234 b.kr., an increase of 56 b.kr. year-on-year. Interest premia on the banks’ foreign bond issues are now close to pre-pandemic levels. The banks have taken advantage of this for refinancing. They have ready access to foreign credit markets, reflecting confidence in the Icelandic financial system.