Financial Stability 2026/1

Geopolitical risk has been substantial and growing in recent months. The conflict in the Persian Gulf has increased risk premia in financial markets, and shifted expectations towards interest rate increases. Supply chains have been severely disrupted, and oil and commodity prices have surged. The impact of the hostilities on global inflation and economic activity will depend largely on how long the war lasts and when important shipping lanes are reopened. Asset prices are high across many markets, and risk premia in bond markets are still very low. If central banks tighten their policy stance, fragilities in individual markets may be exposed. It can be difficult to predict where this will occur, but concerns have been directed, for example, at private credit funds, and increased indebtedness and elevated expectations of investment returns in the technology sector. Major economies’ substantial public financing needs and rising financing costs could exacerbate the problem. Thus there is heightened risk of tightening or shocks in global financial markets, with possible spillovers in Iceland.

Government debt is modest and Iceland’s external position strong, which is important during a time of growing uncertainty. The Central Bank expanded the international reserves in 2025.The ratio of public debt to GDP is now below that in most leading advanced economies. Iceland’s lending terms and sovereign credit ratings have improved. All of this reduces the likelihood that movement of capital to and from Iceland will compromise financial stability.

Households, businesses, and banks are highly resilient overall. The strength of the systemically important banks indicates that they could intermediate credit to households and companies even if economic conditions should tighten. There have been no unambiguous signs of widespread financial distress, and non-performing loan ratios are low in historical and international context. Even though domestic entities are well positioned overall, some sectors are vulnerable to shocks, particularly tourism and construction. If interest rates remain high for a long period of time and inflation is persistent, households’ and businesses’ resilience will be tested.

Many newly built properties are unsold, and selling times are long. The share of newly built properties selling at a discount on the asking price has risen markedly in recent months. The twelve-month rise in house prices has slowed significantly, and real prices are now on the decline. Construction companies’ operating environment has therefore deteriorated, but the sector’s financial strength has grown in recent years. Commercial bank lending to construction firms has increased in the recent term. A growing share of loans to construction firms are
now considered to carry elevated risk.

Efforts are underway to enhance the resilience of financial infrastructure. Interruptions in the operation of financial infrastructure – in payment intermediation, for example – could have widespread effects on multiple financial market entities, jeopardise financial stability, and have a significant impact on society. Structured preparedness for financial market infrastructure as a whole is conducive to mitigating the negative effects of operational disruptions. The Central Bank has launched a financial infrastructure incident centre and has reorganised SURF, the cooperation forum on operational security of financial infrastructure. The Bank’s objective is to bolster preparedness and exchange of information among key entities by contributing to prompt, harmonised, and effective responses.