The Icelandic financial system is resilient. The systemically important banks’ capital and liquidity are strong, and they have ready access to market-based funding. On the other hand, the geopolitical situation is highly uncertain, which could test the domestic economy’s resilience.

Inflation and high interest rates have been challenging for households and businesses, but their balance sheets are strong overall. Debt ratios are low in historical and international context, and arrears are limited. Furthermore, the household saving rate is high, supported by tight macroprudential and monetary policies.

Protectionism in world trade disrupts supply chains and pushes the cost of trade and manufacturing higher, which could distort price formation in the markets and put a damper on investment and economic activity. It could also lead to an abrupt adverse shift in global financial markets. The impact of such a turn of events could reach Iceland, either directly or indirectly. In light of this, it is vital to safeguard financial system resilience, which includes maintaining a strong capital position among domestic deposit institutions.

Operational risk to financial market infrastructure is an ongoing challenge. The Financial Stability Committee (FSN) stresses to operators the importance of contingency and business continuity plans. The Committee also emphasises the importance of continuing to bolster the operational security of payment intermediation, including the launch of an independent domestic payment solution. Additional payment channels should be developed simultaneously, so as to enhance resilience.

The FSN has decided to hold the countercyclical capital 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. 5/2025
26 March 2025