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Iceland’s banking sector: Facts & Figures

Although the Icelandic banking sector was hit hard during the financial crisis of 2008 the transformation and restructuring of the banks laid solid foundations for the continuation of highly developed banking services. The commercial banking sector now consists of three universal banks, one investment bank, and four small savings banks that operate in the rural areas. Total assets amount to ISK 3,334 billion, the equivalent to 140% of GDP in 2016. The banks are predominantly funded with domestic deposits that are around ISK 1,800 billion or little less than 75% of GDP. Bond issuance has been increasing over the last few years: first and foremost the issuance of contingent and covered bonds. Total loans in the banking sector amount to ISK 3,110 billion. Icelandic banks have also sold bonds on the international market in recent years and expectations are that international issuance will increase after the final steps in lifting of capital controls has been taken.

All the major banks have been profitable over the last six years, but with irregular factors, such as the sale of assets and revaluation of loan books contributing to the return on equity. The average interest rate margin has risen from pre-crisis levels reflecting partly the increased share of retail deposits in bank funding. Capital adequacy ratios (CAR) have risen well above the 16% requirement by the regulator and are now generally in the 20-25% range of risk-weighted assets.

All the major banks have been increasing their funding in European bond markets and that trend has been strengthened with significant improvements in their credit ratings in 2016. In March 2017 authorities removed the last remaining hurdles of the capital controls that were introduced in 2008 to stabilise the currency during the financial crisis. The lifting of the capital controls on individuals, firms, and pension funds marks the completion of Iceland’s return to the international financial markets.

The Icelandic economy has been recording healthy GDP growth in recent years spurred on by a significant increase in tourism along with contribution from the export sector. GDP growth in 2016 was recorded at 7.2%. Robust growth has not increased inflation which was steady, around 2%, in 2016. Strong economic performance along with a healthy surplus of current account has led to an appreciation of the Krona in recent years.

At the same time household and private sector debt has not increased. Total loan levels in the banking sector have remained stable although there has been an increase in loans to the tourism sector.

Since October 2015, the ownership of two of the three major banks has been primarily in the hands of the Icelandic government. The government has not introduced detailed plans on how its ownership of the banks will develop. Most shares in the third bank are in the hands of private international funds that had been in the creditors’ group of the estate of the predecessor. The owners are planning to list the bank at the stock exchanges in Reykjavík and Stockholm before the end of 2017. If those plans materialise it would be the first Icelandic bank to list its shares since 2008.

The banking sector in Iceland bears the largest burden of any sector of the economy when it comes to taxes and government fees. The financial sector paid ISK 36 billion in taxes in 2016. Icelandic financial firms pay three sector specific taxes: bank tax, financial activity tax and a special addition to the financial activity tax. The banking sector currently has around 3,000 employees working in 87 branches around Iceland. Both employment and the number of branches have decreased in recent years because of ever-increasing digitalisation of the Icelandic financial sector.

The Icelandic banks are all involved in projects to increase public awareness on the importance of financial literacy. The Icelandic Financial Services Association also runs a joint project called Fjármálavit. The project is based on visits from employees from the Icelandic banks to grammar schools where they talk about money and savings. Fjármálavit participates in the European Money Week.