Icelandic Banking Sector Undergoes Significant Changes Over Last 14 Years

Introduction

The Icelandic banking sector has undergone significant transformations over the last 14 years. The sector has shifted towards more market-oriented practices, and state intervention has decreased.

Asset Growth and Financial Instruments

According to a recent report by the Central Bank of Iceland, commercial banks’ total assets have increased substantially as a percentage of GDP. This growth is largely attributed to the introduction of new financial instruments, such as:

• Bonds sold to the public
• Treasury bills

These instruments have led to an increase in the sector’s ability to attract deposits and invest in various assets.

Central Bank’s Role Evolution

The central bank’s role has evolved significantly over the years. It is no longer solely responsible for setting interest rates, but instead:

• Actively conducts business with commercial and savings banks as lender of last resort
• Serves as clearing agent for cheques
• Provides liquidity to the banking system
• Reduces direct access to central bank accommodation for banks

This shift has led to a more market-based economy, where financial decisions are driven by market forces rather than government intervention.

Deposit Accounts and Lending

Banks have become more innovative in creating new types of deposit accounts, resulting in an increased proportion of total credits granted to:

• The public sector
• Household sectors

However, lending to the business sector has decreased as a percentage of overall lending. This trend is expected to continue as inflation rates decline.

Indexation and the Economy

Indexation, which was virtually non-existent in 1980, now plays a significant role in the Icelandic economy. Approximately one-third of the balance sheet is indexed at the end of 1994. This trend is expected to continue, albeit at a slower pace.

Payment and Settlement System

The payment and settlement system has undergone changes, with banks operating a clearing system through the Banks’ Data Centre, which facilitates:

• The clearing of cheques
• The flow of payments
• Cross-border payments are primarily carried out via SWIFT, a global messaging network for financial institutions.

Conclusion

These changes reflect a move towards a more market-based economy in Iceland. The banking sector has become more market-oriented, and state intervention has decreased. Experts believe that this trend will continue, leading to a more stable and efficient financial system.