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Iceland’s banking sector: Facts & Figures

Updated December 2020 – For earlier editions of Facts & Figures click here

The commercial banking sector consists of four universal banks and four small savings banks that operate in the rural areas. Of the four commercial banks, three are defined as systemically important parties subject to supervision by the Financial Stability Council in Iceland.

Total assets of the banking sector amount to ISK 3,774 billion, the equivalent to around 130% of GDP in 2019. The asset base is predominately domestic: total domestic assets are ISK 3,408 billion or 90% of total assets. Total loans in the banking sector amount to ISK 3,202 billion. The banks are predominantly funded by domestic deposits which amount to ISK 1,932 billion.

The banking sector currently has around 2,700 employees working in 80 branches around Iceland. Decreasing profitability has pushed the banking sector towards boosting returns by streamlining and cutting costs. Commercial banks and savings banks have therefore closed a considerable number of service points and, since 2020, have reduced staff with increased emphasis on electronic self-service solutions.

The overall performance of the three systemically important banks has deteriorated in recent years. The banks’ return on equity was positive by 4.5% in 2019, down from 6% in 2018. The reduction in returns between 2018 and 2019 is due in large part to negative returns on discontinued operations. Credit system lending growth began to taper off over the course of 2019, led by a slowdown in corporate lending growth, and annual growth averaged less than 1% by late 2019. To some extent, slower credit growth reflects weaker growth in economic activity, but in addition to this, one of the commercial banks has announced that it is slimming down its corporate loan portfolio. Since October 2015, 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. The third bank is listed on the stock exchanges in Reykjavík and Stockholm and the sole investment bank is listed on the stock exchange in Reykjavík.

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.

The commercial banks in Iceland have been well prepared to handle operating difficulties, thanks to a strong capital and liquidity position, which is well above the levels required. The countercyclical capital buffer has been released, and the banks have shelved plans for dividend payments. This allows them scope for write-offs and new lending at the same time, thereby giving them the capacity to support households and businesses in times of crisis.

Contributor: Elvar Orri Hreinsson  elvar@sff.is