Már Guðmundsson: The fault-lines in cross-border banking: lessons from the Icelandic case Keynote address by Mr Már Guðmundsson, Governor of the Central Bank of Iceland, at the Banking Law Symposium 2011, OECD, Paris, 4 October 2011. *  *  *  Let me begin by thanking the OECD and other organisers and sponsors for inviting me to speak in this symposium. The title of your symposium is “Crisis management and the use of government guarantees”. This was a highly relevant issue when three cross-border banks in Iceland collapsed in early October 2008, and that is probably why I am here.1 In the panic that gripped global financial markets after the collapse of Lehman Brothers, these banks – like so many internationally active banks around the world – were faced with a wholesale run on their foreign currency liabilities, and were therefore heading towards a default on them in the absence of lender of last resort assistance in foreign currency. However, given the size of the balance sheets involved (10 times GDP overall, with over twothirds in foreign currency), it was impossible for the Icelandic authorities to provide such assistance on their own. It would indeed have been catastrophic if they had made a full-scale attempt to do so. The background to these events was that the Icelandic banking system expanded very rapidly in just under five years. Its balance sheet grew from under 2 times GDP at the end of 2003 to almost 10 times GDP by mid-2008.

Issuance of so-called ‘green sukuk’ has risen sharply in the past three years (Chart 2) – and the Islamic Development Bank issued an innovative $ sustainability sukuk in June.15 But these are still quite modest numbers relative to the vast sums of money now looking to invest in credible ESG assets.16 So there’s plenty of scope for further growth.   Third, the prohibition on many forms of traditional banking in Islamic finance should naturally spur exploration of more innovative forms of intermediation. There’s great interest in exploring the scope for Islamic fintech like Shari’ah compliant e-money platforms and  On this topic, see “Why Economists (and Economies) Should Love Islamic Finance” by Willem Buiter and Ebrahim Rahbari (2015): https://willembuiter.com/if.pdf. 13 See for instance https://bankunderground.co.uk/2020/06/24/pricing-gdp-linked-bonds/ and ‘The Case for GDP-linked Sukuk’ by Arshadur Rahman in ‘Sovereign GDP-Linked Bonds: Rationale and Design’ [2018], edited by Robert Schiller, Jonathan Ostry and James Benford. 14 https://www.bankofengland.co.uk/news/2020/november/hmt-boe-and-fca-convene-working-group-to-facilitate-investment-inproductive-finance. 15 https://www.isdb.org/news/islamic-development-bank-issues-us-15-billion-debut-sustainability-sukuk-in-response-to-covid-19. 16 I discussed these themes in a speech in October 2020: https://www.bankofengland.co.uk/speech/2020/andrew-hauser-theinvestment-association-viewpoint. 12  6  All speeches are available online at www.bankofengland.co.uk/news/speeches and @BoE_PressOffice  6  peer-to-peer lenders, to tackle a range of issues, including financial inclusion.17 The UK is a world leader in this sector (Chart 3). Chart 2 Green sukuk issuance  Chart 3 Number of Islamic finance fintech firms by country  Source: Islamic Financial Services Industry Stability Report 20202  Source: data from https://ifnfintech.com/landscape/, and Bank calculations.