High Credit and Debit Card Fees in Iceland

credit cards Arionbanki

Each transaction made abroad with an Icelandic debit card costs nearly ISK 118 [$0.85, €0.79], RÚV reports. A credit card transaction made abroad can cost nearly ISK 200 [$1.44, €1.34]. The chairman of the Consumers’ Association of Iceland says these transaction fees are much higher than in Denmark, for example, and point to a lack of competition between banks in Iceland.

The figures are from a newly-published report from the Central Bank of Iceland on the cost of fund transfers in the year 2022. That year, a debit transaction within Iceland cost an average of ISK 20, but abroad an average of ISK 118. Within Iceland, credit card transactions cost an average of ISK 51, but abroad they cost an average of ISK 177. For debit cards, that figure includes both the transaction fees and annual fees. Credit cards do not carry transaction fees in Iceland but do have annual fees.

Breki Karlsson, the chairman of the Consumers’ Association of Iceland, says these fees are on the rise. “And in international comparison, they are significantly higher as a proportion of GDP than in Denmark, for example.” Fees for using payment cards abroad are applied in the form of exchange rate surcharges, paid every time a payment card is used at a sales merchant. This surcharge does not apply to debit cards issued by Indó, a newer Icelandic bank. Some card issuers also add a transaction fee on top of the surcharge.

Indexed Loans Dominate Mortgage Market

central bank of iceland

As the payment burden of non-indexed loans continues to rise, households are increasingly moving towards indexed loans. Despite rising interest rates, the banks have not seen an increase in defaults, Mbl.is reports.

Inflation expected to remain high

The deteriorating economic outlook in recent months has led to major upheavals in the mortgage market, Mbl.is reports. Although inflation remains high, and although it is likely that inflation will continue to remain high for some time, borrowers are increasingly seeking shelter from the ever-increasing payment burden of non-indexed loans by moving to indexed loans – this despite the fact that real interest rates on non-indexed loans have been negative for some time.

According to statistics from Iceland’s Central Bank, households took out new mortgages in February worth a total of ISK 3.9 billion [$29 million/€26 million]. Of these, new indexed loans amounted to ISK 6 billion [$44 million/€40 million] while the repayment of non-indexed loans amounted to ISK 2.1 billion [$15 million/€14 million], meaning that many borrowers refinanced their loans in order to transition to indexed mortgages. As noted by Mbl.is, households have taken out indexed mortgages for around ISK 21 billion [$154 million/€140 million] since last December and paid off the non-indexed ones by around ISK 3 billion [$22 million/€21 million].

Indexed loans the most popular mortgage since last fall

As noted in a recent In Focus piece on Iceland Review, to mitigate the fallout from the COVID-19 pandemic, Iceland’s Central Bank slashed interest rates to historic lows in 2020. These cuts resulted in a real-estate boom, with many seeking to take advantage of low rates to secure roomier homes or to refinance.

Read More: In Focus: Indexed Mortgages

The majority of new mortgages signed during the pandemic were non-indexed loans with variable interest rates because such loans carry higher initial payments but allow lenders to own their homes sooner; so long as inflation remained low, monthly payments would remain feasible, and lenders would own their homes sooner.

When the key interest rate began to sharply rise last year, however, lenders were faced with an increased payment burden and began to turn increasingly to indexed loans; the variable base interest rates of the banks’ non-indexed mortgages are now in the range of 8%-9.34% compared to 3.3%-4.44% in December 2020.

This large increase in interest rates has not, however, led to increased defaults among the banks’ customers, Mbl.is notes, although the banks recognise that lenders are increasingly switching to indexed mortgages. About half of all non-indexed mortgages have a fixed interest rate; most of them will not be released until the years 2024 and 2025.

Banks Raise Interest on Non-Indexed Loans

currency iceland

All three of Iceland’s commercial banks announced that they would be raising interest rates on Friday. RÚV reports that Arion Bank, Íslandsbanki, and Landsbankinn are raising interest rates on non-indexed loans, as well as deposits. The hike comes on the heels of a 0.5% increase on key interest rates last week.

Interest rates on most types of non-indexed loans went up by 0.5% at Arion Bank, Íslandsbanki, and Landsbankinn. New non-indexed mortgages offered by Landsbankinn interest rates had a slightly lower hike; those went up 0.25-0.30%.

Read More: Inflation Rate Continues Climb, Now at 9.9% (January 2023)

Non-indexed interest rates on the banks’ home loans are now in the range of 8.0-8.5%, while interest rates on indexed loans remain unchanged.

Deposit rates were also raised, in most cases around 0.5%.

Looking Back: Mortgage Payments Continue Rising in Iceland (August 2022)

Friday’s interest increases come on the heels of the Central Bank’s decision to raise key interest rates by 0.5% last week, bringing it up to 6.5%. This was the Central Bank’s 11th increase on the key interest rate in a row. The lowest this rate has been is 0.75% in the spring of 2021.

Interest rates have not been higher since 2009.

Many Íslandsbanki Buyers Have Already Sold for Profit

Minister of Finance Bjarni Benediktsson

Of the 207 investors who purchased shares in Íslandsbanki bank in a private share offering last month, 132 have already sold some or all of their stake in the formerly state-owned bank, Kjarninn reports. The sellers have made a cumulative profit of ISK 1.6-2.1 billion [$12.3-16.2 million; €11.4-15 million]. Finance Minister Bjarni Benediktsson had previously stated that the aim of the share offering was to acquire long-term investors in the bank.

Íslandsbanki was fully owned by the government until last year, when it sold a 35% stake in the bank, something that had been on the government agenda for years. While that first offering was open to the public, last month’s offering was solely open to professional investors. The second sale was successful, reducing the government’s stake in the bank from 65% to 42.5%. The government has been criticised for the latter share offering’s lack of transparency, and for the 5% discount buyers received on the shares’ market value.

Foreign purchasers sold within days

Notably, six foreign investment funds that were invited to take part in the offering sold all of their purchased shares in the bank within three days of listing, at a significant profit. These funds also participated in last year’s public share offering, meaning they have turned quick profits on the sale of the bank’s shares for a second time. Those funds include Silver Point Capital, Fiera Capital, Lansdowne Partners, and Key Square Partners.

According to the shareholder lists Kjarninn has in its possession, most of the “smaller” investors that took part in last month’s share offering have already sold their shares in the Íslandsbanki. In total, 59 investors were permitted to buy shares for under ISK 30 million and another 79 for under ISK 50 million. Among the purchasers who are no longer listed as shareholders of Íslandsbanki are employees and owners of the consulting company that was hired to manage the stock offering.

Some larger investors who took part in the offering, who bought shares worth several hundred million ISK, have also sold their stake in the bank. This includes Steinn Holding Company, owned by Samherji seafood company CEO Þorsteinn Már Baldvinsson and his ex-wife.

Finance Minister’s father still a shareholder

One particularly controversial buyer in the offering was the company Hafsilfur, owned by Benedikt Sveinsson, the father of Finance Minister Bjarni Benediktsson. The Finance Minister is responsible for the sale of Íslandsbanki, according to law. Hafsilfur is still listed as a shareholder in Íslandsbanki, and its shares have increased in value by around ISK 5 million since the share offering.

Pension funds and other institutional investors have bought up a large part of the shares that smaller investors have sold at profit since the share offering. It was previously reported that pension funds requested to were allotted fewer shares in the offering than they had requested.

The Central Bank of Iceland has stated it is investigating the sale.

Calls on the Banks to “Lighten the Load” of Households

Lilja Alfreðsdóttir

The Minister of Culture and Commerce has called on the banks to “lighten the load” of households faced with rising interest rates. The net profit of Iceland’s three largest commercial banks amounted to approximately 80 billion ISK ($643 million / €564 million) last year, Vísir reports.

“Super profits” and civic duty

In an interview published in Morgunblaðið yesterday, Lilja Dögg Alfreðsdóttir, Minister of Culture and Commerce, called on Iceland’s three largest commercial banks to “lighten the load” of families faced with rising interest rates.

The Central Bank raised key interest rates by 0.75% on Wednesday, which may strain the finances of households who have signed non-indexed mortgages.

The inflation rate in January was 5.7% – the highest since April of 2012 – and the Central Bank predicts an inflation rate of +5% in 2022 (+5.8% in the first quarter), which is double the Bank’s target.

According to Lilja, the three commercial banks have recently reaped “super profits” – a total of ISK 80 billion ($643 million / €564 million) last year – which puts them in a prime position to assist young people and low-income families.

Íslandsbanki announced 2021 profits amounting to ISK 23.7 billion ($190 million / €116 million) this week. Landsbanki, 95% owned by the government, had previously declared profits of ISK 28.9 billion ($232 million / €204 million) for 2021, and Arion Bank announced a profit of ISK 28.6 billion ($230 million / €202 million) for 2021.

Speaking to Morgunblaðið, Lilja invoked the banks’ “civic duty.”

“I think it’s imperative that certain households, especially that of young people and low-income families, are not left holding the bag. It would be better for the banks to intervene immediately and tend to these households. If the banks don’t find a solution, I believe that we should reinstate a levy on banks.”

Lilja followed up her comments by referring to a levy imposed by former British PM Margaret Thatcher, which sought to harvest around £400m from the banks, for they were seen to be “escaping the pain of that recession”: “In 1981, Thatcher instated windfall taxes to deal with precisely such conditions, to level the playing field among the citizenry,” Lilja remarked.

Intervention lowers the selling price

In an article published on Innherji this morning, Guðrún Hafsteinsdóttir, Chair of the Economic and Finance Committee, stated that forcing the banks to spend a portion of their profits to subsidize interest payments would serve to devalue Íslandsbanki shares (the government has yet to sell 65% of its share in the bank).

Asked to respond to Lilja’s comments, Guðrún remarked that they had taken her by surprise. “If the government intends to alter the banks’ operational conditions, such a thing must, one way or another, influence the price of the remaining shares in Íslandsbanki. It’s obvious that if the government, as a shareholder, intervenes in such an encumbering manner, the selling price will be affected.”

As noted by Innherji, the government expects to sell its remaining 65% of shares this year and the next. The treasury received ISK 55 billion ($442 million / €388 million) when it sold its 35% share in a stock offering of Íslandsbanki last year. Since then, stocks have risen considerably. Innherji estimates that, according to the current market valuation, the government stands to receive up to ISK 160 billion ($1.3 billion / €1.1 billion) for its remaining shares.

Government to Sell State-Owned Íslandsbanki

Iceland’s government will likely sell one of three state-owned banks this coming spring. The bank in question is Íslandsbanki, though it is not clear what percentage of the bank, now fully state-owned, will be put up for sale. The sale is intended to reduce government risk as well as meet the government deficit expected next year as a result of the pandemic.

According to a government notice, Iceland’s Minister of Finance Bjarni Benediktsson has approved a proposal from the state holding company ISFI to sell Íslandsbanki. The Minister will now prepare a report, to be reviewed by Parliamentary committees and the Central Bank of Iceland. After considering their comments, the Minister will make a final decision on whether to begin the sale process, expected by January 20.

What percentage of the bank is to be sold is not yet known, though earlier this year government ministers discussed a possible sale of 25-50% of its shares. The aim is to sell shares in a public offering and subsequently list all shares in the bank on a regulated securities market in Iceland.

Iceland an Outlier in State Ownership of Banks

The Icelandic government owns a bigger proportion of its country’s banks than any other government in Europe. Two of the country’s three largest banks are in state ownership: Íslandsbanki (100%) and Landsbankinn (98.2%). Reducing state ownership of financial institutions has been an aim of Iceland’s financial policy in recent years and is part of the current coalition’s government agreement. The sale of Íslandsbanki has been in discussion for some time.

Read More: Sale of State-Owned Banks in Iceland

The government notice states that market conditions now appear to be favourable for the sale, in addition to which the bank is in a good financial position. Its sale is intended to reduce government risk in the financial system, promote competition in the banking industry, and increase domestic investment opportunities for individuals and professional investors.

The COVID-19 pandemic and the government’s economic response measures are expected to result in a deficit of around ISK 320 billion ($2.5 billion/€2.1 billion) in 2021. “With the sale, we mitigate the blow of the coronavirus crisis considerably, in addition to which it makes it easier for us to finance continued measures for people and businesses,” stated Finance Minister Bjarni Benediktsson.

Record Real Estate Movement in May and June

apartments downtown Reykjavík housing

Movement on Iceland’s real estate market broke records in May and June, increasing by around 50% compared to the same period last year. Banks also approved a record ISK 22.3 billion ($159 million/€140.5 million) in new housing loans in May. Experts say historically low interest rates have encouraged buyers, despite the downturn caused by the COVID-19 pandemic.

The data comes from the Húsnæðis og Mannvirkjastofnun (HMS)’s monthly report. HMS’s CEO Þorsteinn Arnalds told RÚV it’s difficult to pinpoint the cause of growth. Some economic uncertainty in the fall of 2018 may have led to a build-up of people wanting to buy but waiting for a better opportunity. “And then definitely factors such as lower interest rates have pushed many, because it’s definitely possible for many people to buy up without increasing their debt to income ratio greatly or that sort of thing.”

Housing prices have risen by 5.5% in Reykjavík between May of 2019 and 2020. There was also an increase in notarised purchase agreements in the rest of the country.

In Focus: Sale of State-Owned Banks

sale of state-owned Icelandic banks

For years, Iceland’s government considered selling 25-50% of Íslandsbanki bank, currently fully owned by the State Treasury. Reducing state ownership of financial institutions was a turnaround in Iceland’s financial policy that had been in development for years. With memories of the banking collapse still strong in the minds of the public, many were opposed to […]

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Government to Sell Share in Íslandsbanki

Prime Minister Katrín Jakobsdóttir says that proceeding with the sale of part of the government’s share of Íslandsbanki is “sensible” provided that the proceeds go towards investment in Icelandic infrastructure, Kjarninn reports. Doing so would free up governmental assets for use in much-needed projects. Discussions about the expected sale have already taken place within the ministerial committee on economic affairs, which Katrín sits on alongside Minister for Finance and Economic Affairs Bjarni Benediktsson and Minister for Education, Science, and Culture Lilja D. Alfreðsdóttir.

Katrín says that emphasis will be placed on making the sale open and transparent. The government will not be involved in the decision about who will be sold up to 25% of its share in the bank. The sale will take place via a listing on the Icelandic Stock Market. “It is important that this is fair for those who are interested,” she noted.

The Icelandic government currently owns all of Íslandbanki’s stocks, as well as the vast majority of Landsbankinn’s. The government has hoped a foreign bank would buy a share in Íslandsbanki, preferably one based in a Nordic country. Thus far, however, no such entity has expressed an interested in doing so.

Unlikely to get full price, but still worth it

The government’s current agreement states that Iceland’s financial system must be stable and serve Icelandic society in a cost-effective and fair manner. It also notes that “[t]he state’s ownership of financial institutions is the most extensive in Europe and the government wants to find ways of reducing this.”

A 2018 white paper outlining a “future vision for the financial system” of Iceland discussed in detail how the proceeds from the sale of shares in state-owned banks should be used. Conducting the sales via stock market listings is meant to restructure ownership of Íslandsbanki and Landsbankinn and ensure that well-distributed and stable ownership of these institutions will be a facet of the financial system in the future.

In an interview with Morgunblaðið on Wednesday, Minister for Finance and Economic Affairs Bjarni Benediktsson noted that given current market valuations, it is unlikely that the government would be able to obtain the full recorded price for the share, which is over ISK 170 billion [€1.2 billion; $1.35 billion]. “It is, nevertheless, right in my opinion that [the government] should give up ownership in stages and a 25% share in the bank is worth tens of billions of krónur,” he concluded. “We could then use that capital toward profitable investments in infrastructure.”

‘The economy is ready’

Bjarni published his views on the potential benefits of the proposed sale of up to 50% of the government’s share in Íslandsbanki in a special Independence Party publication on Thursday entitled “On the Right Track.”

“In recent years, there’s been a lot of talk about tariffs to fund public transportation improvements and that’s understandable,” he wrote, “because we need to speed up construction, but a more convenient way is to [sell] this valuable asset and limit tariffs in the future to larger construction projects on the level with [the tunnels] Sundabraut, Hvalfjarðargöng, and other tunnel construction. This is a good time to consider these kinds of efforts; the economy is ready for public construction.”

Bjarni has been a vocal and repeated advocate for the sale of the government’s shares in Íslandsbanki and Landsbankinn, although he does want the government to retain a minority share in the latter bank.

Samherji and Iceland Under Scrutiny

Prime Minister Katrín Jakobsdóttir is prepared to ensure any additional funding that may be needed to investigate Samherji’s operations in Namibia. Icelandic banks also report that they plan to investigate their business with Samherji. The Organisation for Economic Co-operation and Development (OECD) says Iceland’s handling of the bribery scandal will be a touchstone case and plans to follow the matter closely.

Government investigates

Prime Minister Katrín Jakobsdóttir stated in an interview on Kastljós yesterday that if tax authorities need more funding to conduct an investigation into Samherji’s affairs, it will be provided, so that the issue is researched “with due diligence.” The Prime Minister added that it’s also necessary to consider whether laws need to be amended in order to require large unlisted companies, like Samherji, to submit comparable information to companies listen on the stock market.

Icelandic banks investigate

Arionbanki’s board of directors has requested a detailed examination of the bank’s business with Samherji. Friðrik Sophusson, chairperson of the board at Íslandsbanki, says the board will likely discuss the issue at a meeting today. Helga Björk Eiríksdóttir, chairperson of Landsbanki’s board, stated the bank cannot comment on issues relating to its customers, but is legally bound to carry out statutory supervision of its customers.

Norwegian bank DNB is reviewing the tax component of Samherji’s case. The bank ceased its business relationship with Samherji last year as it deemed the company a money laundering risk.

Björgólfur Jóhannsson, who took over as CEO of Samherji following Þorsteinn Már Baldvinsson’s resignation last Thursday, says that one ship which is part of the company’s foreign operations is financed through an Icelandic bank. Björgólfur says the company will provide banks with information on its finances if it is requested.

Þorsteinn Már has not only stepped down as CEO of Samherji, he has also requested indefinite leave from the board of Síldarvinnslan and stepped down as board director of Faroese fishing company Framherja.

“Touchstone case,” says OECD

Drago Kos, chair of the OECD Working Group on Bribery, says the case data appears trustworthy, and the case will be a touchstone for Icelandic authorities. The case is being formally investigated by Icelandic police, and the OECD will follow its development closely.

“For us at the OECD, it will be a good test of the Icelandic police and the prosecution to see how they handle the case,” Kos stated. “We are closely monitoring the case’s progress.” Kos says he hopes Icelandic authorities will address the case “within a reasonable timeframe, in a quick and efficient way,” underlining that the first step is to determine whether the allegations are in fact true.