Már Guðmundsson: The financial crisis in Iceland and the fault lines in
cross-border banking
Speech by Mr Már Guðmundsson, Governor of the Central Bank of Iceland, at FIBE, Bergen,
7 January 2010.
* * *
It gives me great pleasure to be here in Bergen this morning to give an address on the
financial crisis in Iceland, and I would like to take this opportunity to thank the organisers for
Icelandic mysteries.
inviting me to do so. You call this session At this juncture, this is a more
apt phrase than you might think. We are currently waiting for the findings of a
parliamentappointed committee that has been working hard for over a year, collecting evidence and
analysing the causes of the financial crisis in Iceland. The committee is due to release its
report in early February, and we hear the report and supporting material will be well in
excess of a thousand pages. We know how the Icelandic banks failed in the autumn of 2008
and can identify some of the key vulnerabilities that led to their demise. However, some
important pieces of the puzzle are still missing, in particular regarding the governance and
risk management of the banks, on the one hand, and the Icelandic authorities' crisis
management and interaction with their counterparts in other countries, on the other.
So what I will present here today is unavoidably a partial picture.1 You could say that it is just
as well, for this is a complex saga with many twists. To paint with a broad brush, we can say
that economic and financial developments in Iceland during the last decade or so are a
combination of two separate but interrelated stories. On the one hand, there is Iceland's
boom-bust cycle and problems with macroeconomic management in small, open and
financially integrated economies. This is a well known story that has played out in Iceland
and other countries several times. On the other hand, we have the story of the rise and fall of
three cross-border banks operated on the basis of EU legislation (the European "passport").
That story, at least for smaller countries, is much more unique than the first.
In my remarks today, I will concentrate mostly on the second story, which is probably more
suited to this audience, as I understand that the conference is oriented towards
microeconomics and finance. However, it must be remembered that although these two
stories are different, they interact in important ways. Thus the unsustainable boom that
Iceland experienced during the years 2005-2007 was fuelled by a combination of favourable
external conditions, macroeconomic mismanagement, and aggressive domestic bank
lending. It may well be that the banks' international activities and the easy access to foreign
credit that came with those activities fuelled stronger growth in domestic bank lending than
would have occurred in a more traditional small-country banking system. But we cannot be
sure to what degree, as we know that unsustainable domestic credit booms fuelled by capital
inflows can very well take place in countries that are not home countries to international
banks.
An important channel of interaction was through the exchange rate. On the one hand, low
risk aversion and ample liquidity tended to boost both the exchange rate of the króna and the
banks' share prices at the same time. On the other hand, a speculative position against the
share price of the banks tended to weaken the króna, as the banks were listed in Iceland and
their equity denominated in krónur. Furthermore, as the banks' official accounts and equity
2⁄3
were denominated in Icelandic krónur, while of their balance sheet was in fact
denominated in foreign currency, they tended to hedge their equity, which, during the
weakening phase of the króna, tended to weaken it further. These relationships emerge
clearly in the graphs below, which show the strong correlation between international liquidity
conditions, as measured by an index constructed by the Bank of England, the exchange rate
of the Icelandic króna and share prices of listed financial institutions.
International financial market liquidity The króna exchange rate and bank stock
and the króna exchange rate prices
Liquidity index Index, January 2005 = 100 Index, January 2005 = 100 Index, January 2005 = 100
2 120 250 120
110 110
1
200
100 100
0
90 90
150
-1
80 80
-2
100
70 70
-3
60 60
50
-4
50 50
40 40
-5 0
2004 2005 2006 2007 2008 2004 2005 2006 2007 2008
Financial market liquidity (left axis) Real stock prices for financial institutes (left axis)
Effective exchange rate (right axis) Effective exchange rate (right axis)
The liquidity index shows the number of standard deviations from the mean
(exponential moving average) from a simple average of nine liquidity measures,
Source:Bank of England, Central Bank of Iceland. Source:EcoWin Reuters, Central Bank of Iceland.
As so often occurs in great tragedies, the two stories converged in a grand finale in early
October 2008, when nearly nine-tenths of Iceland's banking system collapsed when its three
large cross-border banks - Glitnir, Landsbanki, and Kaupthing - were taken into special
resolution regimes on the basis of the emergency legislation that had just been passed by
Parliament. This added significantly to the recessionary forces that were already at play in
the Icelandic economy as the macroeconomic imbalances created in 2005-2007 subsided.
But here again, it is still an open question what is due to what, i.e., what is the specific
contribution of the banking collapse over and above an international recession and a
domestic macroeconomic adjustment? The fact of the matter is that the contraction in 2009
has proven smaller than originally predicted, with the fall in GDP now expected to be around
71⁄2-8%, as opposed to the 10% forecasted earlier in the year, and unemployment still
around 8%. Conditions are expected to deteriorate further in the first half of this year,
however, with unemployment peaking at around 10%. But who knows? Maybe the economy
will prove more resilient and will surprise once again on the upside.
It is clear from these numbers that, in terms of the macroeconomic impact of the international
financial and economic crisis, Iceland is not at the top of the league. There are probably
several explanations for this. Automatic fiscal stabilisers were allowed to work more or less
freely in 2009, with fiscal consolidation taking hold this year. Last year, Icelanders were
allowed early withdrawal from their third-pillar pension funds, to the tune of 11⁄2% of GDP,
which is equivalent to a fiscal stimulus. The financial restructuring of corporations and
households has been delayed and, although this is detrimental for medium-term recovery, it
has postponed some of the pain. The depreciated exchange rate has stimulated the traded
goods sector. The manufacture of consumer and capital goods has a relatively low weight in
the Icelandic economy, but the demand for these was hit disproportionally during the
postLehman economic confidence crisis in the second half of 2008 and first half of 2009. Finally,
although the destruction of wealth that Iceland has experienced as a result of the collapse of
the Icelandic banks is enormous, it is not proportionate to the size of the banks, as foreign
creditors will lose much more.
Let us now turn our attention from the macroeconomic part and explore further the story of
Iceland's cross-border banks, which to my mind holds important lessons for cross-border
banking more generally, both from the standpoint of the small economy and at the European
and global levels.
In the rest of my remarks, I will first give you a short overview of how the Icelandic banks
failed. I will proceed to explain the build-up of these cross-border banks and the associated
vulnerabilities. I will then return to the collapse of the banking system by discussing crisis
management and resolution before turning to some of the causes. Finally, I will reflect on the
lessons learnt and some of the issues that remain unresolved.
How did the banks fail?
Iceland's three cross-border banks all failed and were placed in special resolution regimes
during the first full week of October 2008. Refinancing their foreign currency liabilities had
become a concern in the mini-crisis of 2006, as I will discuss later, but proved increasingly
difficult as the global financial crisis tightened its grip in successive waves from the autumn of
2007 onwards. The banks were thus forced to halt any further expansion and begin
deleveraging in order to create the foreign exchange liquidity they needed in order to survive
until foreign funding markets opened again. In the conditions then reigning, it was not easy to
dispose of assets; however, two of the banks, Landsbanki and Kaupthing, were able to
improve their foreign liquidity position by collecting deposits abroad. Kaupthing did so mostly
through subsidiaries, but Landsbanki collected deposits primarily through branches in the UK
and the Netherlands. This was to prove devastating for Iceland when the bank failed,
because of the resulting dispute about the settlement of deposit insurance.
But what had been difficult before the Lehman collapse in mid-September 2008 became
almost impossible afterwards. In the immediate aftermath of the Lehman bankruptcy,
crosscurrency liquidity management of banks and other entities became very difficult as FX swap
markets became severely impaired and there was a general scramble for dollar liquidity
around the globe. The Lehman bankruptcy led to a major loss of confidence, where concerns
over protecting one's own solvency and liquidity led financial institutions worldwide to take
action that, although rational from the standpoint of individual institutions, was disastrous for
the system as a whole. Credit lines were closed, margin calls were made, and all but the
safest assets sold off at fire sale prices. Emerging market assets experienced a sell-off as a
part of this process, and funds were repatriated back to the US in order to meet margin calls
and repay debt.
In normal times, managing liquidity across currencies from countries with free movement of
capital and relatively developed capital markets is not much of an issue. In these conditions,
FX swap markets can speedily be used to convert liquidity from one currency to another at
spreads that closely reflect the differences in domestic money market rates in the two
countries concerned. In other words, the covered interest parity condition broadly holds.
Visà-vis the US dollar, this relationship showed periodic strain for most currencies after the
financial turmoil erupted in late summer 2007, but it broke down almost completely after
Lehman. There are probably several reasons for this, some of which were analysed in BIS
Quarterly Review
publications such as the during the period when I was still there.2 Thus, for
instance, we know that before the crisis, European banks had a structural imbalance where
they had invested in longer-maturity USD assets and financed them partly in USD interbank
markets at shorter maturities. When these dried up, there was probably a scramble to get
USD liquidity through FX swap markets, with the result that those markets became
dysfunctional as well.
This problem was significantly mitigated with the FX swap lines that the US Fed negotiated
with the ECB and other major central banks, especially after these became uncapped in
some cases. But the problem was not confined to currency pairs involving the US dollar, and
a similar kind of dynamic played out for smaller currencies in Europe vis-à-vis the euro,
especially where banking systems had significant short-term foreign refinancing needs, or
what can also be called rollover risk in terms of foreign currency.
In some cases, FX swap lines were granted vis-à-vis the dollar, the euro and the yen, and in
some cases not. Where swap lines were granted, it helped. And for some of the smaller
players, it might not have mattered terribly much which of the major international currencies
they hooked on to in this sense, especially after the uncapped swap lines had been
established.
What we observed during this peak of the crisis was thus a run on cross-border banking
operations. We know how to solve such problems domestically by letting central banks lend
to markets and/or institutions through their almost unlimited short-run capacity to expand
their domestic balance sheet. However, when it comes to foreign currency, a central bank's
capacity to help banks to refinance the foreign liquidity denied them on the market is limited
by the size of its reserves or the willingness of its big neighbours to help.
This is what did the Icelandic banks in. At that point, their balance sheet was almost 11 times
GDP, with the foreign currency part constituting 2⁄3, or almost 71⁄2 times GDP. And as is
always the case in banking, there was a significant maturity mismatch between the asset and
liability sides. Compare these numbers to the reserves of the Central Bank of Iceland, which
were 21% of GDP at the time; a swap agreement with the Nordic countries amounting to
€1.5 bn, or around 12% of GDP; and committed credit lines of around 2% of GDP, or a total
of around 35%. This is dwarfed by the foreign currency liabilities of the banks, even if some
of them were, of course, longer-term. These defences could only buy limited breathing space
in the face of a full-scale run on cross-border operations of banks this size. Further research
is needed before we can assess to what degree such breathing space would have facilitated
a more orderly and less costly episode than the complete collapse that took place.
At any rate, it is clear that this limited ability was one of the factors behind the decision not to
grant Glitnir a loan of last resort amounting to €600 m, which it requested on 25 September
in order to cover a loan repayment in mid-October. Instead, the Government, on the advice
of the Central Bank, announced on 29 September that it was taking a 75% equity stake in
Glitnir valued at €600 m. This implied a big fall from what such a stake was valued at in the
market the week before. In the following week, the equity price collapsed further, ending the
week 75% below its value at the end of the preceding week.
This action did not boost market confidence in the Icelandic banking system. On the contrary,
it intensified the run. On the following day, both the sovereign and the banks were
downgraded by two notches, followed by widespread margin calls and closing of credit lines.
The foreign deposits that had helped to alleviate the foreign liquidity squeeze experienced
outflows. And the equity loss involved in the Glitnir takeover created a domino effect within
the Icelandic financial system.
It was becoming clear that the entire system was on the brink of collapse, and on 6 October
2008, the Icelandic Parliament passed emergency legislation with the objective of ensuring
continued domestic banking operations. The following day, the Icelandic Financial
Supervisory Authority (FME) intervened in the operations of Glitnir and Landsbanki. On
October 8, following perfunctory exchanges between the UK Chancellor of the Exchequer
and the Icelandic Minister of Finance, the UK government froze the assets of Icelandic banks
in the UK and took over Singer & Friedlander, a British-licensed subsidiary of Kaupthing. The
deposit part of Singer & Friedlander was transferred to ING. Later that day, a system-wide
response of central banks and governments emerged, emphasising international
coordination. Such efforts were too little and too late for the Icelandic banks, and on
October 9, the FME intervened in Kaupthing Bank.
The collapse of these three banks was quite large, not only relative to Iceland, but also on an
absolute scale. According to Moody's list of defaults during the period 1920-2008,3
Kaupthing, at USD 20 bn, ranks 4th after Lehman, Worldcom and GMAC, with Glitnir close
on its heels. The combined balance sheet of these failed banks was much larger than that of
Worldcom, and only Lehman's was bigger. And the effect was felt far and wide, as these
banks were truly international. Kaupthing alone was active in 13 jurisdictions.
It might be of some interest that the possibility that the Icelandic banks might fail in precisely
the way they did was much more widely foreseen than is currently acknowledged. Available
on the BIS website is a speech that I gave on 18 May 2007 before the Institut International
d'Études Bancaires, entitled Financial globalisation and challenges for prudential policies and
macroeconomic
management, where I said: "...emergency liquidity assistance will be
complicated or even impossible for central banks to deliver when internationally active banks
face liquidity problems in currencies other than that of their home country. Iceland is a case
in point."4 But this was before the breakout of the financial turmoil in August of the same
year, and in company with many others, I saw this as a tail event rather than an immediate
possibility, although concern was beginning to creep in. However, as the financial crisis
intensified, the risks mounted, and by early 2008, both the banks themselves and the
Icelandic authorities were acutely aware of it.5 This is why the Central Bank was actively
seeking to conclude FX swap agreements with major central banks and why, in May 2008,
parliament authorised large-scale foreign borrowing in order to boost reserves. Both efforts
were largely unsuccessful, except for the €1.5 bn swap agreement with the Nordic countries.
The committee investigating the collapse will probably throw light on why that was.
The build-up
So how were these mammoths created? Following a process of consolidation and
privatisation, which was largely completed in 2003, the Icelandic banks grew very rapidly.
With headquarters in Reykjavik, they expanded their activities abroad, for the most part by
acquiring financial institutions in other countries, opening up bank branches, and stepping up
their foreign operations. This phenomenal growth was made easier by Iceland's membership
in the European Economic Area (EEA). The EEA Agreement provided a legal and regulatory
framework based on EU Directives. This meant that the operating licences held by Icelandic
financial institutions were not limited to Iceland but included all the countries in the EEA. The
European "Passport" gave the banks the scope to operate throughout the EEA, including
permission to operate branches in other EEA countries.
Statistics give a picture of rapid-fire growth over a very short period (see graph). From 2003
to 2007, the banks' total assets grew from less than two times Iceland's GDP to almost nine
times. Right before their collapse, total assets amounted to eleven times GDP. Over 40% of
total assets were in foreign subsidiaries, 60% of total lending was to non-residents, and 60%
of income was from foreign sources. Over two-thirds of lending and over three-quarters of
deposits were denominated in foreign currency, notably in pounds sterling. Around 85% of
the banks' foreign lending was in Europe, with half in the Nordic countries, a third in the
United Kingdom, and a tenth in the Benelux countries.
Banks' balance sheet expansion and Currency composition of deposits 2007
leverage
% of GDP Total assets/Equity
Other; 14%
1000 18
ISK; 22%
900
17
800
700
16
600
500 15
400
14 EUR; 16%
300
200
13
GBP; 45%
100
USD; 3%
0 12
2003 2004 2005 2006 2007 2008
Total assets (left axis) Leverage ratio (right axis)
Consolidated accounts of three largest commercial banks. 2008 data is end-June. Deposits to customers. From the largest commercial banks'
consolidated accounts.
Source:Commercial banks' annual reports, Central Bank of Iceland.
Source:Central Bank of Iceland.
It is important to note that the phenomenal growth of the Icelandic banks was enabled but not
caused by the common European legal and regulatory framework. As we all know, from the
early 2000s to the middle of 2007, highly unusual conditions developed in the international
financial markets. The supply of credit was plentiful, and interest rates were lower than they
had been at any time in the 20th century. The financial markets eagerly sought bonds,
including those of the Icelandic banks, which were suited for use in various kinds of
structured products, partly because their ratings were high compared to their CDS spreads.
The banks were under regular scrutiny by international credit rating agencies, which at one
point took them to triple-A. In turn, the good ratings facilitated their push into the bond
market. Finally, the banks became an important part of the Icelandic economy, their
expansion and that of Icelandic firms enjoyed broad support, they paid high salaries, and the
Treasury received sizable tax receipts based on their activities, direct and indirect.
In the first half of 2006, the Icelandic banks narrowly escaped the so-called mini-crisis. In late
2005 and into 2006, the banks began to attract international attention. A notable shift in
market attitudes was reflected in rising credit default swaps. Analytical coverage of the banks
became critical, expressing significant concerns about their ability to manage risk or to
exploit economies of scale given such rapid growth. The enormous dependence on
wholesale financing given the low share of deposits as a proportion of total funding, lack of
transparency, cross-ownership ties and connected lending, and other points were also
mentioned. Up to that time, the banks had actively sought to raise funds with large
international bond issues and were strained to bring in funds for all their activities, which now
become more difficult.
Both the banks and the authorities reacted to the criticism by cleaning up their act, but also
by taking the offensive with a propaganda campaign.6 That worked. In retrospect, one could
even say this was unfortunate, as it would have been much easier to reduce the size and the
riskiness of the system in the conditions prevailing in 2006 than in 2008. Furthermore, one of
the solutions was to start collecting deposits abroad, which was to prove devastating for the
Icelandic nation once the banks failed.
The banks also entered new markets, including the US, where issuers with good credit
ratings found it easy to sell bonds. As a result, risk appetite returned and Moody's took the
banks to triple-A for a while in 2007. Moreover, the Icelandic banks were perhaps better
prepared than otherwise for the dramatic reversal of market sentiment that took place in
mid2007. Interestingly, the high credit default swaps compared to their ratings made the banks'
bonds good input for structured products. That, however, was to prove a big drawback for the
banks once the financial crisis hit for real in 2007 and 2008, as the sell-off of structured
products pulled Icelandic bank shares with it and sent CDS spreads through the ceiling.
The fact that the Icelandic banking system was based on EU legislation was conducive to
cross-border expansion. However, in spite of all its merits, there were fatal flaws in this
system. The basic problem was that, although banking and regulation was European, both
supervision and the safety net of deposit insurance and lender of last resort were national.
The same applied to a significant degree to crisis management. There was an inherent
vulnerability and risk associated with this setup, especially for small countries outside the
euro area. This proved fatal for Iceland, in part because it made the mistake of taking
European regulatory directives as mostly binding, but not as a minimum. However, the
biggest design failure was in the case of deposit insurance, because not only did it violate the
principle of matching international private action with international public measures, but it
also violated the insurance principle of pooling. European banks need European deposit
insurance. That is how it is.
Crisis management and resolution
Let me say a few words about crisis management and resolution in the case of the Icelandic
banks. During the height of the crisis, its management left a great deal to be desired,
especially the cross-border part:
• There was lack of information sharing and co-operation across affected jurisdictions.
•
There was early sale of "good" assets at fire sale prices, which will lead to lower
recovery ratio for bond holders.
•
UK authorities froze and ring-fenced assets.
•
Further research will throw light on the UK decision to close Singer & Friedlander,
which brought down Kaupthing - however, a lender of last resort (LOLR) loan in
Sweden.
•
A consequence of all of this is the dispute with UK and Dutch authorities over the
settlement of deposit insurance claims related to Landsbanki branches. This
problem is still negatively affecting the economic resurrection of Iceland. It is a big
topic in its own right, but I am not going to say more about it here, as involves
international relations, European legal issues, and balance of payments and debt
sustainability issues, and as such, is far beyond the scope of my topic today.
Bank resolution on the Icelandic side has been somewhat more orderly. It was shaped by the
initial goal of securing continued banking operations in the country. First, we have the
Emergency Act of 6 October 2008, under which the FME acquired broad-based intervention
rights; deposits were assigned higher priority than other unsecured claims; and government
capital injections received parliamentary approval. Then the Government issued the
statement that all deposits in Iceland were guaranteed.7
The tool used to reach this goal was to split the banks into new and old banks, along
domestic and foreign lines, in such a way that the foreign creditors do not suffer over and
above what was implied by giving deposits seniority over other claims. When these drastic
actions are assessed, one must bear in mind the dire straits Iceland was in at the time and
the sense in the country that it was under financial siege. Furthermore, the banks' assets
were 10 times GDP, and in the absence of international cooperation, forced downsizing was
the only option. The new banks are 1.7 times GDP.
The domestic system functioned more or less seamlessly throughout, but demand for cash
tripled and almost outstripped physical supply for a few days until the Government issued the
statement that domestic deposits were safe. International payment flows were seriously
affected, however. Payments stopped at first, as the correspondent banking system seized
up due to uncertainty, attempts at netting and punitive actions, and the UK freezing order.
Normal functioning was gradually restored with Central Bank involvement.8
Since November 2008, continuation of the resolution process has been part of an IMF
programme whose main elements are stabilisation of exchange rate, a plan for fiscal
sustainability, and resurrection of the financial system.9 All the three banks are now up and
running, and two of them are majority-owned by the foreign creditors of the old banks. The
savings banks will be financially restructured in the coming weeks.
The causes
Earlier in my remarks I told you how the banks failed. Does this also tell us why they failed? I
think it does so only partly. The interplay between trust, liquidity and solvency is complicated
when it comes to banks. Banks fail because they lose trust. That loss of trust might not be
warranted, in which case the bank will face a liquidity problem. However, it might still fail if it
is not supported by a credible lender of last resort, or if the liquidity problem lasts long
enough. The line between liquidity and solvency can be a thin one. An underlying solvency
problem will often manifest itself as a liquidity problem, and over time, a liquidity problem will
often create a solvency problem.
Did the Icelandic banks face a solvency problem? Not if we look at what used to be the
traditional metrics before the crisis, cf. the displayed table.
Kaupthing Landsbanki Glitnir
CAD ratio 11.2% 10.3% 11.2%
Tier 1 ratio 9.3% 8.2% 8.0%
Leverage ratio 15.1 20.0 19.3
Equity/tangible assets 5.2% 4.0% 3.6%
Bond maturity 5y 5y 3.2y
Deposits/funding 32.3% 72.4% 20.8%
Liquidity ratio 1.95 1.74 1.52
Compared to peers, their capital and leverage ratios were not out of line. Neither do the
underlying liquidity problems glare at us through these metrics. But that might say more
about the metrics than the reality. Add to this the fact that, around a month before the
collapse, the FME issued statements about how well the banks performed on a range of
stress tests. However, these stress tests were flawed in the sense that they did not include
liquidity. Furthermore, they tested one institution at a time and did therefore not take into
account the interconnectedness and contagion elements that proved so important during the
collapse.
Capital adequacy and funding duration for some selected
banks in March 2008
12
ratio
Kaupthing
11,5
adequacy
11 Glitnir Landsbanki
Capital
10,5 Handelsbanken
10
DnB NOR
9,5
Intesa Sanpaolo
Swedbank
9
8,5
1 2 3 4 5 6 7 8 9
Remaining time to maturity of issued securities
Sources: Bloomberg, Riksbank.
A great deal of value is lost at the very moment when banks stop being going concerns.
However, low estimated recovery rates after the banks' collapse seem to indicate the
existence of an underlying solvency problem. It also raises questions about the quality of
accounting. This is one of the mysteries that still wait to be solved.
My list of causes for the collapse of the Icelandic banks is the following:
• Large foreign-currency balance sheets with significant maturity mismatches but
without a LOLR.
• Size relative to the home base (country and currency).
•
Fatal flaws in the EU financial architecture.
•
Bad and non-cooperative crisis management across interested jurisdictions.
But there were also triggers and contributing factors:
•
The international financial crisis and all the usual suspects that have been named in
relation to it, including incentive systems, regulation and supervision.
•
Flaws in business models and risk management.
•
Iceland's large macroeconomic imbalances.
•
Domino vulnerabilities in Iceland's financial sector (e.g., cross-ownership, connected
lending, large exposures across institutions).
•
Bad governance and accounting?
Lessons and unresolved issues
Before making my final remarks, let me mention briefly some of what I consider the main
lessons and unresolved issues in relation to both the Icelandic banking crisis and
cross-border banking more generally.
•
The risks in cross-border banking were underestimated, especially the
crosscurrency part.10
•
The crisis had significant elements of a run on cross-border banking. In Iceland's
case, a partial run on deposits in foreign branches and subsidiaries also contributed.
•
Sizeable cross-border banking operations in small countries with their own currency
are too risky.
•
The EU architecture for cross-border banking is profoundly flawed, as it allowed free
flow of capital and banking services with domestic safety nets and crisis
management.
•
Either we regress (de-globalisation and the death of branches) or we move towards
EU supervision, deposit insurance, crisis management and resolution regimes for
cross-border banks.
•
Key proposals (e.g., the De Larosière and Turner reports)11 do not go far enough
and do not measure up to the Icelandic experience (wrongly seen as primarily a
supervisory failure, which it was only in part).
•
Do we need a system of FX swap lines or an FX liquidity pool to provide insurance
against a run on cross-border banking (as we have domestically through central
bank liquidity provisions and LOLR)?
•
The crisis showed that, when all is said and done, "banks are international in life, but
national in death!"12 Will reforms change this, or will we regress? The question
remains open.
Concluding remarks
I told you in the beginning that this is a complex saga with many twists. I have only covered a
small part of it. However, be sure that there is more to come. I am currently reading a newly
published biography of Snorri Sturluson.13 He and other Icelanders wrote about events that
occurred here in Norway and Iceland, in some cases more than two centuries earlier. We
might thus be writing about the Icelandic financial crisis for centuries as well! If history is any
judge, then we are probably better at it than we were this time at managing, regulating and
supervising a cross-border banking system. For the sake of all of us, let us at least hope so.
Thank you very much.