13 March 2024

Statement of the Financial Stability Committee 13 March 2024

The Financial Stability Committee

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. Inflation has eased, and aggregate demand is rebalancing. Real interest rates have risen, and private sector demand for credit has subsided.

Debt ratios have fallen and are now lower than they have been for years. Households’ equity position has improved with the rise in house prices and the real decline in debt. At the same time, borrowers’ debt service burden has increased, but arrears remain limited. Higher real interest rates have tightened firms’ operating environment and are likely to continue affecting it in the coming term. On the other hand, firms’ equity is strong in most sectors, adding to resilience.

The outlook is for population growth and the aftereffects of the seismic activity in the Reykjanes area to boost residential real estate market activity despite current interest rates and the restrictions due to borrower-based measures. House prices are still high compared to fundamentals, and it is important that borrowers be cautious in taking on risk when buying real estate.

Heavier debt service burdens concurrent with weaker growth in economic activity exacerbate the likelihood of financial distress, with negative implications for financial stability. 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 FSN reiterates its support for the advancement of the bill of legislation on increased operational security in payment intermediation, which is currently before Parliament. It is important both to give comprehensive consideration to the resilience of payment intermediation with an independent domestic payment solution, and to bolster competition, strengthen cyber- and operational security, and ensure business continuity.

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. 6/2024
13 March 2024