Iceland credit growth could cause setback in tourism -central bank

COPENHAGEN/REYKJAVIK– 19 October 2017: Iceland’s central bank said on Wednesday the outlook for the country’s financial stability is good but warned that a further increase in lending to the booming tourism industry could have consequences for the entire economy.

Having been hard hit in the 2008 financial crisis, Iceland’s economy is again hot with foreign investors seeking exposure to its surging tourism sector, banks, property, infrastructure and the soaring krona currency.

“Lending for investment in tourism-related sectors and for real estate purchases has not yet reached dangerous levels,” the bank said in a financial stability report published Wednesday.

A setback in the tourism industry - due to natural disasters or changed market conditions - would spill over into the real estate market where prices are already at historical highs in real terms and be a shock for the whole economy, the bank said.

“Although danger signs exist, there are many indications that the real estate market could experience a relatively soft landing,” it said.

The central bank, which raised the countercyclical capital buffer for banks to 1.25 percent last year, said it would be “appropriate” to raise it to 2.5 percent in coming quarters in preparations for more difficult times.

The buffer aims to force banks to accumulate extra capital during boom periods.