COPENHAGEN (Reuters) – Large banks in Iceland are strong enough to weather any economic disruption caused by the COVID-19 pandemic, but potential debt bubbles arising after the crisis have to be closely watched, the central bank’s Financial Stability Committee said on Wednesday.
“The banks are quite resilient thanks to a strong capital and liquidity position, which is well above Central Bank requirements,” the central bank said in a report.
If the pandemic does not last too long, banks will be able to help keep households and businesses afloat, it said, but also warned of potential debt bubbles forming in the economy, spurred by the accommodative monetary stance taken by the central bank.
The central bank has lowered its key interest rate to 1% from 4.5% in the last 13 months, most recently in May when it also predicted the economy would shrink 8% this year – its biggest contraction in a century.
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“As a consequence, it is important to monitor developments in private sector debt closely in the coming term and take appropriate action if increased risk appetite leads to excessive credit growth,” it said.
The central bank released banks’ emergency buffer – known as the countercyclical capital buffer – in March to encourage banks to keep lending money. It would keep the buffer rate at zero for the next nine months, it said.
Reporting by Nikolaj Skydsgaard and Jacob Gronholt-Pedersen; Editing by Gareth Jones and Nick Macfie
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