Birgir Ísleifur Gunnarsson: Iceland in a global setting Keynote speech by Mr Birgir Ísleifur Gunnarsson, Chairman of the Board of Governors of the Central Bank of Iceland, at the Euromoney conference on the Nordic Financial Markets and Investment Opportunities, Stockholm, 13 September 2002. *  *  *  Mr. Chairman, ladies and gentlemen. It is a pleasure to participate in this ambitious conference on the Nordic Financial Markets and Investment Opportunities. I will in my remarks today mainly focus on aspects relating to Iceland. Size separates Iceland from the other Nordic Countries, Denmark, Finland, Norway and Sweden. Other factors separate the Nordic Countries as well. Finland is a member of the European Union and the Economic and Monetary Union, EMU, as well. Denmark and Sweden are members of the European Union but are outside the EMU. Norway and Iceland are outside the European Union but maintain very close ties to it, particularly through the European Economic Area Agreement. That agreement makes Norway and Iceland a part of the single market of the European Union, which entails among other things that they are obliged to maintain financial market legislation, which fully conforms to that of the European Union. The Nordic Countries have different monetary regimes. Finland is a member of the EMU, Denmark is linked to the EMU through an ERM II agreement entailing that the Danish krona is very closely tied to the euro. Sweden, Norway and Iceland have chosen an inflation-targeting regime as their monetary framework (Iceland in March 2001).

Although developments in Iceland showed many of the same characteristics as those in some of the other Nordic Countries during the post-liberalisation rapid expansion, such as credit expansion, current account deficit, exchange rate depreciation and so on, Iceland escaped the difficulties suffered by banking systems in some of the other countries. Icelandic bank credit grew very rapidly in the late 1990’s and into the year 2000 and a sizable portion of the credit expansion was financed with credit from abroad. The capital adequacy ratios of banks fell for a while but nevertheless remained comfortably above the minimum required and internationally recognised levels. The year 2001 also turned out to be quite favourable for the banks, a development which continued by and large into the current year. Consequently, the capital position of the banks has improved and all the major banking institutions have relatively strong capital adequacy ratios at present. Loan losses have increased, as was to be expected in the wake of the credit expansion, but nowhere on the scale experienced in some of the other Nordic Countries a decade ago and very much less than they did during the downturn in the Icelandic economy around and after 1990. The conclusion to be drawn is, therefore, that the Icelandic banking system weathered the relatively turbulent post-liberalization boom period of 2000 and 2001 pretty well and is well poised to meet new challenges, including continued rationalisation and intensified competition from foreign banking institutions. In the most recent decades, the Icelandic economy has also seen structural shifts.