Central Bank of Iceland Financial Stability Committee keeps countercyclical capital buffer at 2.5% and urges offline card-based payment solution

The Central Bank of Iceland’s Financial Stability Committee published a financial stability statement assessing the Icelandic financial system as being on a solid footing and decided to keep the countercyclical capital buffer unchanged at 2.5%. Systemically important banks are described as having a strong financial position and good access to market-based funding, including recent refinancing of foreign market debt on favourable terms and with longer maturities. The statement flags rising external risks linked to the conflict in the Persian Gulf, including disrupted supply chains, higher commodity prices, increased global uncertainty, a weaker inflation outlook, and expectations of higher interest rates and weaker economic activity. Domestically, resilience is attributed to tight bank capital requirements and borrower-based measures for homebuyers, alongside low and falling private sector debt ratios and limited arrears. Housing prices remain high but have tapered off in real terms, while a higher number of homes for sale and longer selling times are highlighted, particularly for new builds; construction sector debt to the banking system has risen, and lenders are asked to watch for increased risk given high interest rates and slower sales. The Committee also calls for enhancing the resilience of systemically important infrastructure in light of geopolitical tensions and potential hybrid threats, including diversification of payment channels and rapid adoption of an offline card-based payment solution. The Committee stated it will continue to use the policy instruments at its disposal to preserve financial stability so the financial system can mediate credit and payments and redistribute risks appropriately.