The Financial Stability Council held its third meeting in 2019 on Thursday, September 26.
Growth prospects in the global economy have worsened and uncertainty in international markets has increased since the last meeting of the Financial Stability Council. The first signs of increased defaults in the financial system have emerged in tandem with slowdown in economic activity in Iceland. Defaults are most notable in lending to construction and tourism. The decline in revenue in tourism has been smaller than indicated by the reduction in tourists and thus the industry is in a better position than was expected last spring. Uncertainty remains regarding the economic outlook and how developments in the economy may affect the financial system. Growth of private sector debt has slowed somewhat, especially commercial debt. Prices of residential real estate have changed little over the past months while supply increases. Commercial real estate prices, however, are still rising considerably.
The commercial banks are resilient enough to meet further setbacks. Their capital ratios are somewhat above their total requirements. The banks' liquidity ratios are above limits, but the liquidity position in Icelandic krónur could be improved. Favorable conditions in the past years have increased the economy's ability to deal with shocks. The external position of the economy is positive and public and private sector debt is historically low. Monetary policy and fiscal policy have considerable scope to respond to adverse developments and the Central Bank's foreign exchange reserves are large.
The Council approved a recommendation to the Financial Supervisory Authority on maintaining the countercyclical capital buffer unchanged for the time being. Although the economy is now slowing down, debt impairment is still low. The Financial Stability Council will continue to monitor credit developments in relation to the next recommendation on the buffer.