Statement of the Financial Stability committee 28 September 2022
The global economic outlook has deteriorated recently, which would adversely affect the Icelandic economy. Trading partner inflation is at its highest in decades, and central banks have resorted to steep policy rate hikes. Furthermore, the war in Ukraine has pushed energy prices upwards in Europe and, along with other factors, has exacerbated uncertainty. Risks to financial stability in Iceland have increased because of worsening external conditions, and the balance of risk is tilted to the downside.
The systemically important banks are highly resilient. Their capital and liquidity are strong. The Central Bank of Iceland’s stress test for 2022 shows that the banks are well prepared to respond to external shocks and simultaneously support households and businesses.
Icelandic real estate prices have soared and have deviated widely from fundamentals. The rise has largely been equity-driven, and household debt levels have kept pace with incomes in recent years. More stringent borrower-based measures in the housing market has reduced issuance of new high-risk loans, contributed to an increase in homeowners’ equity ratio, and safeguarded new borrowers’ debt service capacity. These measures, together with interest rate hikes, have eased tensions in the market.
Increased external uncertainty highlights the importance of maintaining the resilience of the Icelandic financial system. Iceland is better positioned than many of its trading partners, but vigilance is required to preserve financial stability.
The Financial Stability Committee decided to hold the countercyclical capital buffer unchanged. The decision taken in September 2021 to increase the buffer from 0% to 2% will take effect tomorrow, 29 September 2022.
The Committee stresses the importance of bolstering security in domestic payment intermediation so as to guarantee business continuity, partly in view of growing cyber threats. Steps have been taken towards the development of an independent domestic retail payment solution, which is highly important in the current situation.
The Financial Stability 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.
No. 18/2022
28 September 2022