These two decisions hopefully give some indication of where the Central Bank considers that it currently stands in the battle against inflation. This battle is a priority and there is no doubt that a successful outcome is very much in the national interest, not least for young people who have taken on heavy liabilities to secure themselves short-term or long-term housing. Household debt with the deposit money banks has surged in Iceland in recent years. However, debt service as a proportion of income has not grown, due to the more favourable credit terms now available, as well as rising incomes. Loan delinquency is still minimal. Both these indicators are very positive. However, this does not alter the Central Bank’s concerns about excessive borrowing, or at least very precarious borrowing, which could make the foreseeable economic contraction very tough for indebted households, and in some cases insurmountable. In such conditions, rising inflation could deal many households a heavy blow. Some people have responded to Iceland’s relatively high interest rates and price indexation by switching their debts to foreign currencies, but the benefits could prove short-lived if the króna depreciates. A depreciation would be instantly reflected in repayments on these foreign loans. Its impact on domestic indexed borrowing would be less and come later. 2  BIS Review 42/2007  At the last annual meeting, it was pointed out that the Central Bank had strongly encouraged financial institutions to curtail their credit growth at that time which, in the Bank’s view, had gone beyond all reasonable bounds.
In the world of finance, some of the questions being asked today are: What makes a bank a bank? Will digital currency ever replace central-bank issued money? Or more likely, will central banks issue their own versions of digital currency and in the process, disintermediate banks? Are banks selling financial products, or are they offering a lifestyle, opportunity and the freedom to pursue a new and different path in life? What business are banks really in? When everyone stopped using film in cameras, one wonders if Kodak realised that it was actually in the business of capturing memories. Or when smartphones burst into the mobile handset market, did Nokia realise that their business was not selling mobile handsets, but connecting people with the world around them? Three years ago, McKinsey predicted that technological advancements will redefine the landscape of finance, and then went on to argue that incumbents had – at most – a brief window of five years to adapt or risk becoming obsolete. You may or may not agree with this, but I think it would be hard to deny that a shake-up of the industry is already present. To some extent, the finance industry has been responding. Total IT spending is estimated at over $ billion every year across the regions of North America, Europe, Asia Pacific and Latin America. In 2016, a single global bank spent $ billion, or 16% of its expenses on technology.