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.

Of course, this changing environment requires significant investment in technologies and human resources with added pressure on banks’ bottom line. Also it may potentially encourage more risk aversion, despite the ultra-accommodative monetary policy stance. It is critical, therefore, that regulators ensure a level playing field to avoid regulatory arbitrage and push banks to retrench, thus creating market gaps that can be exploited by  Page | 3  less regulated, or more importantly, by totally unregulated players. Today’s increasingly digitalised world enables these gaps to be filled with relative ease. Institutions must embrace innovation while exploiting more effectively and smartly the prevailing benign economic conditions, to discover new investment opportunities and niche markets. It is also an opportune time for banks to keep sight of their longer-term sustainability and maintain their efforts to repair their balance sheet, reduce concentrations and improve asset quality. This is what ultimately strengthens prospective future cash flows and what supports profitability. Banks are also, of course, entitled to set their own risk appetite. In well-functioning markets, business opportunities shunned by one bank will be taken up by a competitor, if the latter feels more confident that it can manage the underlying risks more effectively. There will always be a residual sort of non-bankable business, and we must accept this fact. If, however, a business in search of a bank is especially risky but legitimate, there is no reason why we should not welcome specialist legitimate players capable of withstanding the most rigorous standards of supervisor scrutiny.