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  6  BIS Review 9/2010  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.

Philipp Hildebrand: Lessons from the crisis for global financial market infrastructure Summary of a speech by Mr Philipp Hildebrand, Vice-Chairman of the Governing Board of the Swiss National Bank, at the Zermatt Symposium, Avenir suisse, Zermatt, 25 August 2009. The complete speech can be found in German on the Swiss National Bank’s website (www.snb.ch). *  *  *  The financial market infrastructure, in other words, the systems for trading, clearing and settling payments and financial instruments, is essential for the operation of the financial system. Thus far in the financial crisis, financial market infrastructure has stood up well overall and helped to prevent the existing uncertainty in the financial system from becoming even greater. This holds true both for payment and settlement systems in Switzerland and for the global financial market infrastructure. However, time and again, it becomes apparent that the infrastructure for clearing and settling transactions is not keeping up with rapidly growing financial markets. In recent years, this has been most obvious in the OTC derivatives market. Pressured by supervisory authorities and central banks, market participants are now developing safer and more efficient clearing and settlement arrangements for OTC derivatives. These efforts include the establishment of central counterparties, which facilitate market participants’ risk management, promote market transparency and reduce the complexity of the financial system. To the extent that the market infrastructure reduces the interconnections between individual financial institutions, it contributes to the long-term strategy aimed at finding ways of liquidating large and complex financial institutions in an orderly way.