As a result of these developments along with the globalization of financial markets, every trading institution has become more exposed to changes all over the world economies and financial markets. This has led all institutions including central banks to develop new processes in their organizations to manage the risks in a more systematic way, although they used to have had implicit risk management practice. Parallel to these developments in risk management, the practice of reserve management by most of the central banks has changed significantly over the last decade. Once characterized by passive short-term investment strategies to preserve principal value and maintain maximum liquidity, many central banks now use a broad range of instruments, extend their portfolio duration and develop performance benchmarks. This increased attention to risk management and new approach to reserve management by central banks has come about not because of any change in central bank missions, but because of the growing recognition that the conduct of core businesses inevitably involve exposure to financial risks and also because of increased attention to the contribution of central bank profits to national treasuries. Advances in financial risk management brought more scope for central banks to consider increasing their portfolio returns together with maintaining the desired level of liquidity, which is the primary target for central banks. 1  BIS Review 38/2000  Then, the important question of how an effective risk management system can be developed, comes out. The answer to this question does not change depending on the objectives and the size of the institution.

It therefore comes as no surprise to hear the view expressed that the capital controls should be maintained on a more permanent basis. This is not as attractive an option as might appear at first glance, however. In the first place, liquid capital cannot be kept here forcibly for an indefinite period of time. The controls are a violation of various international agreements signed by Iceland. They are tolerated as long as Iceland follows the economic Recovery programme supported by the IMF, and thus indirectly by the member states of the EEA, OECD, and the Fund itself. Soon after this programme concludes, the controls will likely have to disappear; i.e., if the Icelandic government does not wish to renege on international treaties it has ratified. Eventually, frozen capital will have to be allowed to go wherever it wishes. Second, long-term confidence cannot be established as long as uncertainty exists as to how much capital is tied up in ISK assets simply because of the capital controls. This uncertainty will not dissipate fully until they are removed. Until that time, there is a risk that it will restrain foreign investment, which is a premise for export-driven economic recovery. Third, the hefty profits that can accrue to parties that circumvent the capital controls undermine business ethics and create a competitive advantage vis-à-vis those who abide by the law. The controls prompt individuals and firms to devote efforts to seeking ways to circumvent them, resulting in waste of resources and excess cost in the economy in the longer term.