The Central Bank of Iceland has published Stress Test 2025, its first standalone stress test report, concluding that Iceland’s three systemically important banks are resilient enough to maintain the supply of credit and support the economy in a severe shock scenario. The report also compares results with the European Banking Authority’s stress test and reviews the Central Bank’s credit growth model and its interaction with the real economy. The stress scenario is based on hypothetical but severe events involving heightened geopolitical tensions and an escalation of war, leading to GDP contraction, higher unemployment and a steep decline in asset prices. Loan losses are estimated at ISK 145bn, or 3.3% of the claim value of the loan portfolio at the start of the test, while after-tax losses peak at ISK 13bn in the most difficult year as core operations offset credit costs. The common equity Tier 1 capital ratio falls by 1.3 percentage points to the trough, but overall and CET1 capital requirements are met in all years of the horizon, making it unlikely banks would need to significantly curtail lending. With assumptions comparable for the first time to the European Banking Authority’s 2025 stress test of 64 European banking conglomerates, Icelandic banks’ capital and leverage ratios are shown to decline only modestly relative to European banks, reflecting a higher leverage ratio and relatively limited market risk.
Central Bank of Iceland 2025-09-12
Central Bank of Iceland publishes Stress Test 2025 and finds systemically important banks resilient under severe geopolitical shock
The Central Bank of Iceland's Stress Test 2025 report concludes that Iceland's three systemically important banks can maintain credit supply and support the economy under severe stress scenarios, with loan losses estimated at ISK 145bn and after-tax losses peaking at ISK 13bn. The report, aligning with the European Banking Authority's stress test, indicates that Icelandic banks' capital and leverage ratios decline modestly compared to European banks, meeting all capital requirements throughout the test horizon.