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Icelandic Commercial Banks’ Balance Sheets See Significant Changes Over Last 14 Years

A recent review of the balance sheets of Icelandic commercial banks has revealed significant changes over the past 14 years. According to data released by the Central Bank of Iceland, total assets of the commercial banks have increased substantially as a percentage of GDP.

Composition of Assets and Liabilities

One notable change is the disappearance of produce loans rediscounted by the central bank, which were a major component of commercial banks’ balance sheets in 1980. Instead, new items such as bonds sold to the public and Treasury bills have emerged.

• Commercial banks have been creative in developing new types of deposit accounts, leading to an increase in credits granted to the public and household sectors at the expense of lending to the business sector.
• Bank loans to the business sector have increased in GDP terms, with variable interest rates being the norm.

Indexation

Indexation has also played a significant role in the Icelandic economy over the past 14 years. At the end of 1994, approximately one-third of the balance sheet was indexed, compared to almost nil in 1980. However, with inflation coming down, efforts are now underway to reduce the use of indexation on bank deposits and short-term instruments.

Payment and Settlement System

The payment and settlement system operated by commercial banks and the central bank has also undergone significant changes over the past decade. The Banks’ Data Centre facilitates the clearing of cheques and the flow of payments, including giro payments, with net results settled on participants’ current accounts with the central bank daily.

Key Statistics

• Total assets of commercial banks increased by 35% as a percentage of GDP between 1980 and 1994.
• Foreign-currency-linked assets represent about one-fifth of total assets, with a similar proportion on the liabilities side.
• Indexation has become increasingly prevalent in the Icelandic economy, with approximately one-third of the balance sheet being indexed at the end of 1994.

Conclusion

The review of commercial banks’ balance sheets over the past 14 years highlights significant changes in the composition of assets and liabilities. While some items have disappeared, others have emerged, and indexation has become increasingly prevalent. As inflation continues to decline, efforts are underway to reduce the use of indexation on bank deposits and short-term instruments.