Icelandic Financial System Resilient, Geopolitical Uncertainty Poses Threat To Economy: Central Bank

(RTTNews) - Iceland's financial system remains resilient, but the highly uncertain geopolitical situation could test the strength of the domestic economy, the central bank said on Wednesday.

"The systemically important banks' capital and liquidity are strong, and they have ready access to market-based funding," the Central Bank of Iceland's Financial Stability Committee said in a statement.

The committee decided to hold the countercyclical capital buffer rate unchanged at 2.5 percent. According to the Basel, Switzerland-based BIS, the countercyclical capital buffer aims to ensure that banking sector capital requirements consider the macro-financial environment in which banks operate.

The primary objective of CCyB is to use a buffer of capital to achieve the broader macroprudential goal of protecting the banking sector from periods of excess aggregate credit growth that have often been associated with the build-up of system-wide risk, the BIS states on its website.

Balance sheets of the Icelandic households and businesses are strong overall despite facing challenges from inflation and high interest rates, the committee observed. Debt ratios are at historically low levels and the household saving rate is high, underpinned by tight macroprudential and monetary policies.

The central bank warned against direct or indirect spillovers to Iceland from an abrupt adverse shift in global financial markets that could arise from protectionist actions in world trade.

"In light of this, it is vital to safeguard financial system resilience, which includes maintaining a strong capital position among domestic deposit institutions," the committee said.

The committee noted that the operation risk to the financial market infrastructure remains a challenge and stressed the importance of contingency and business continuity plans.

The bank also emphasized the importance of continuing to bolster the operational security of payment intermediation, including the launch of an independent domestic payment solution. Additional payment channels should be developed simultaneously, so as to enhance resilience, the committee said.