Beyond measures to enhance technological diversity in our core infrastructure, we continue to make meaningful progress developing manual contingency procedures in the event of a protracted wholesale service disruption from which we cannot recover on a same day basis, our best efforts to ensure resiliency notwithstanding. Recognizing the constraints on operating capacity in such a scenario, this work seeks to maintain critical functionality and to identify and support systemically important payments in our transaction flow to mitigate customer and market impacts. Increasingly, this work extends beyond the Federal Reserve to include infrastructure peers and other systemically important market participants to test our protracted outage hypotheses and manual contingency procedures. It also complements a number of industry initiatives, including the work of the Payments Risk Committee and the newly established Financial Systemic Analysis and Resilience Center, to consider systemic risk mitigants in the event of a major outage of a large payments processing financial institution. Notwithstanding progress advancing these important initiatives, and in recognition of their enormous complexity, the message for policy makers, boards of directors, and senior management of systemically important institutions is to invest sufficiently in resiliency and security such that we never find ourselves reliant on manual contingency measures whose invocation is likely to produce profound, and unpredictable, consequences. One sphere of resiliency that has grown in prominence for payment and market infrastructures over the past year has been the focus on endpoint security, a theme that has also captured the attention of global policy makers.

On the other hand, it is hard to imagine that this scenario could have played out as it did without the worldwide glut of cheap credit in the years before the global financial crisis and Iceland’s position as a party to the EEA Agreement, which provides for a legal and regulatory framework based on European Union Directives, including free movement of capital and provision of financial services. The underlying principles are those of home licensing for operation throughout the EEA and a level playing field for competition, where size and location are not supposed to matter. This European “Passport” enabled the Icelandic banks to operate throughout the EEA, including through branches in other EEA countries. We know now that there were and are deep flaws in this framework: flaws that are important elements in the current eurozone crisis. A key issue here is the dichotomy between  BIS central bankers’ speeches  1  European passport rights, on the one hand, and national supervision, national deposit insurance, and national crisis management and resolution regimes, on the other. This is what recent proposals of a banking union are supposed to deal with. But then, for EEA countries outside the euro area, this framework entails potentially enormous foreign currency liquidity risk in the banking system that is not covered by a lender-of-last-resort (LOLR). This was a key element in the Icelandic banking crisis and must be addressed in future reforms of the system. Let me now say a few words about Iceland’s crisis and recovery.