Financial Stability 2026/2

Geopolitical risk is significant, and the global economic outlook is uncertain. Commodity prices have risen and grown more volatile. Central banks in several leading advanced economies have raised interest rates, and further rate hikes are expected. Prices in foreign asset markets are generally high, reflecting investors’ risk appetite and elevated expectations. Growing doubts about fiscal sustainability in various countries and the substantial need for capital for investment in AI have pushed long-term government bond yields higher in the US and elsewhere. Long-term Government bond yields in Iceland have held broadly steady, however. A changed international trade environment, higher interest rates, and turmoil in foreign markets could dampen economic activity and undermine financial stability in Iceland.

It is vital to strengthen the resilience of systemically important infrastructure and establish diverse and reliable alternate solutions. The rapid development of AI exacerbates cyber risk in the financial system. It can increase the speed, scale, and complexity of cyberattacks; enable more threat actors to launch sophisticated cyberattacks; and shorten the time available for defence and response. As a prerequisite for financial stability, the infrastructure that plays a key role in the provision of critical financial services must function properly and be able to withstand severe operational disruptions. Furthermore, changes in technology and infrastructure require that financial system preparedness evolve in line with changed conditions.

Real house prices have fallen recently, housing supply has grown, and market turnover has subsided. The number of purchase agreements shows, however, that the market is active and the share of first-time buyers relatively high. High months of inventory and high interest rates put construction firms’ financial position to the test. Commercial bank lending to construction firms has grown rapidly, and systemic risk has increased. Non-performing loan ratios have risen, but financial distress is not widespread as yet.

Households, firms, and banks are well positioned overall. The systemically important banks are highly resilient, and their profits are solid. The private sector debt-to-GDP ratio is low in historical and international context. There have been no unambiguous signs of widespread financial distress among households and businesses, and non-performing loan ratios are low. If interest rates and inflation remain high for a protracted period of time, households’ and firms’ resilience could be tested. Iceland’s strong economic position and ample international reserves enhance the economy’s ability to withstand shocks.