Icelandic households both pay and earn bank interest

Icelandic households are both major borrowers from banks and important sources of their funding, meaning interest paid by one household can become a return for another, Jón Guðni Ómarsson writes in an opinion article published by mbl.is.

Banks are publishing their results, and debate over their performance is under way alongside discussion of planned increases to the bank tax in the budget bill. High interest rates place a heavy burden on borrowers, particularly young people who have recently bought homes. But, Ómarsson argues, it is also important to ask where the interest payments go.

Banks act as intermediaries between those who provide funds and those who borrow them. A substantial share of the interest they collect goes towards interest paid on deposits and other funding.

Public debate often focuses on how much profit banks make, and less on who ultimately benefits. The state owns almost all of Landsbankinn, while the country’s pension funds own just over 40% of Íslandsbanki and more than half of Arion Bank. Across the four commercial banks, about 80% of their equity is publicly owned, either directly or through pension funds and the state, Ómarsson writes.

Households also hold substantial financial assets, both directly and through pension funds. Statistics Iceland’s financial accounts put their net financial assets at about 10,100 billion Icelandic krónur at the end of 2025, roughly twice the country’s gross domestic product.

By the middle of this year, households held nearly half of domestic bank deposits, while pension funds owned more than half of the banks’ bonds held by domestic investors. Together, households and pension funds accounted for more than half of domestic bank funding in the form of deposits and bonds.

Interest income is also part of the returns earned by pension funds on people’s savings. Some of the interest paid today therefore contributes to future pension income. But high lending rates do not guarantee strong returns: what matters for savers’ purchasing power is the real return, after inflation.

Ómarsson illustrates the effect with a calculation. If 15.5% of a person’s wages were paid into pension savings for 40 years, starting from a monthly wage of 500,000 krónur that rose by 2% a year above inflation, the savings would reach about 62 million krónur at a real return of 0.5%, compared with about 91 million at a real return of 2.5%. The difference is nearly 30 million krónur, despite identical contributions.

If the savings were then paid out over 20 years, with the same real return continuing, the monthly payment would be about 270,000 krónur in the first case and about 480,000 in the second, in today’s purchasing power. That is a difference of more than 200,000 krónur a month for two decades.

Behind one person’s interest income, Ómarsson concludes, are another person’s interest payments.