20 September 2023

Statement of the Central Bank of Iceland Financial Stability Committee 20 September 2023

The Financial Stability Committee

The Icelandic financial system is on a solid footing. The systemically important banks’ capital and liquidity are strong. In recent months, the banks have mitigated their foreign refinancing risk with bond issuance. Stress tests indicate that the banks are highly resilient and able to support households and businesses as necessary. Arrears are limited, and on the whole, borrowers appear well positioned. In view of this, the Financial Stability Committee (FSN) has decided to hold the countercyclical capital buffer rate unchanged at 2.5%.

Iceland’s economy has recovered rapidly over the past two years. Increased economic activity has led to a rise in household and business income. A period of weaker economic activity and worsening financial conditions now lies ahead. Higher interest rates have added to debt service burdens, particularly for borrowers carrying non-indexed variable-rate loans. The fixed-rate clauses that have protected borrowers against rising debt service are beginning to expire. This represents a challenge for borrowers and lenders.

The FSN urges lenders to give attention to the rise in the debt service burden. Possible solutions in this regard include lengthening loan maturities, converting loans to an annuity format, capping nominal interest rates, and offering other loan types. Most borrowers have ample equity, which should provide plenty of room to adjust loan payments to debt service capacity and simultaneously ensure that it remains in line with the criteria provided for in the borrower-based measures set by the FSN. The Committee also urges borrowers to avert potential financial distress by seeking prompt assistance from their lenders if they expect their debt service burden to become onerous.

It is vital to continue strengthening financial institutions’ cyber- and operational security and to further bolster the resilience of payment intermediation in Iceland. The FSN considers the steps taken towards infrastructure for independent domestic retail payments a positive move and agrees with Government proposals to expand the Central Bank’s authority in this area.

The Committee will continue to apply the policy instruments at its disposal so as to preserve financial stability in Iceland, thereby enabling the financial system to mediate credit and payments and redistribute risks appropriately.

No. 15/2023
20 September 2023