The Icelandic financial system is on a solid footing and is well prepared to withstand unforeseen shocks. The systemically important banks’ financial position is strong, and their access to market-based funding is good. In the recent term, the banks have refinanced foreign market-based debt on favourable terms, with longer maturities.
The conflict in the Persian Gulf has disrupted supply chains and pushed the price of oil and other commodities higher. Global economic uncertainty has escalated even further, the inflation outlook has deteriorated, and expectations of higher interest rates and weaker economic activity are widespread. Over time, the repercussions of this could challenge financial stability.
The domestic economy is in many ways well positioned to face these challenges, not least because of tight capital requirements imposed on banks and tight borrower-based measures for homebuyers. Private sector debt ratios are low and have been falling, arrears are limited, and other financial distress appears to be insignificant. Treasury debt is modest, the external position of the economy is strong, and the Central Bank’s international reserves are ample. Furthermore, Iceland’s international trade has been in balance, which is reflected in a stable foreign exchange market. It is important to maintain the domestic economy’s resilience to global uncertainties.
House prices are still high by most measures but have tapered off in real terms. The number of homes on the market has risen, and selling times are longer than before, particularly for new builds. Construction industry debt to the banking system has grown in the recent term, but arrears are still limited. Because of high interest rates and longer selling times, lenders must be on the watch for increased risk in the sector.
The Financial Stability Committee stresses that the resilience of systemically important infrastructure must be enhanced in light of growing geopolitical tensions and potential hybrid threats. It is vital to diversify payment channels in Iceland and adopt an offline card-based payment solution as soon as possible.
In its quarterly review of the countercyclical capital buffer, the Committee decided to hold the buffer unchanged at 2.5%, in accordance with its policy on the application of the buffer. As before, the Committee will apply the policy instruments at its disposal so as to preserve financial stability, thereby enabling the financial system to mediate credit and payments and redistribute risks appropriately.
No. 4/2026
25 March 2026