05 June 2024

Statement of the Financial Stability Committee of the Central Bank of Iceland 5 June 2024

The Icelandic financial system is on a solid footing. The systemically important banks’ capital and liquidity are strong, and they have ready access to funding. Arrears are still at a low level despite high interest rates. It is well to bear in mind, however, that persistent inflation concurrent with weaker economic activity will present challenges for the financial system in the coming term.

Real estate market activity has increased. Population growth, income growth, and the repercussions of earthquakes and volcanic eruptions near the town of Grindavík have stimulated demand. By the same token, growth in lending to construction and real estate firms is robust, and the construction sector labour force has expanded.

The private sector debt-to-GDP ratio has declined in the recent term and is low in historical context. The equity position of households carrying mortgage debt has continued to strengthen, but their debt service burden has grown heavier. The rise in real interest rates has weakened households’ disposable income and firms’ operating environment. The effects of this are likely to come even more strongly to the fore in the coming term. On the other hand, households’ equity position is sound, as is that of companies in most sectors.

There are signs that the economy is slowing down alongside the rise in real interest rates. Heavier debt service burdens in tandem with weaker growth in economic activity exacerbate the likelihood of financial distress. In order to maintain the banks’ resilience, the Financial Stability Committee (FSN) has decided to keep the countercyclical capital buffer rate unchanged at 2.5%. The Committee stresses the importance of a robust capital position under current circumstances.

The FSN emphasises the importance of operational security in payment intermediation. The resilience of payment intermediation should be addressed in a comprehensive way, including through harmonisation of financial market responses to operational incidents, contingency exercises, and cybersecurity testing. The FSN is of the view that the passage of the bill of legislation amending the Act on the Central Bank of Iceland as regards operational security in payment intermediation, which is currently before Parliament, will facilitate greater security and resilience.

The Committee will continue to 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.

Press release no. 10/2024
5 June 2024

See further:

Background to the decision on the countercyclical capital buffer, memorandum

Background to the decision on the countercyclical capital buffer, data