Iceland’s economy is advanced, transparent and dynamic. The population is relatively young, well educated and quick to adapt to technological and scientific innovations. A strong fully funded pension system has been built up and, unlike other countries, there is no reason to fear for its sustainability. GDP per capita ranks with the highest in the world, and the economic and social infrastructure is solid. The openness of the economy results in a smaller effect from a contraction in domestic demand on employment than might be expected. The authorities shape the framework in which businesses and the financial system operate. Through its membership of the European Economic Area, Iceland enjoys similar operating conditions to those within the European Union. Nonetheless, it retains various features that influence economic advancement, such as a rather business-friendly tax environment, efficient public administration and flexible labour market. Extensive and rapid transformation of the financial sector puts supervisory agencies under pressure. The Financial Supervisory Authority (FME) has been granted an increasingly wide remit in recent years and its activities have been strengthened. One task is to monitor the banks’ transactions with main shareholders and executives. Payment and settlement systems are a key component of an efficient and sound financial system. Steps have recently been completed towards bringing their regulatory framework into line with international best practice. Although such work tends to go relatively unnoticed, it is crucial for enhancing security of settlements and reducing technical risks. The main financial sector vulnerabilities are presented in the table below.

Davíð Oddsson: The commercial banks are more resilient Opening statement by Mr Davíð Oddsson, Chairman of the Board of Governors of the Central Bank of Iceland, on behalf of the Board of Governors at a Press Conference on the occasion of the publication of the Bank’s Financial Stability 2007, 25 April 2007. *  *  *  In its analysis published in Financial Stability at the beginning of May 2006, the Central Bank of Iceland’s finding was that the financial system was broadly sound, but more challenging waters lay ahead. Two main causes of concern were identified: macroeconomic imbalances and uncertainty about the commercial banks’ refinancing of their foreign borrowing. Refinancing was successfully completed. However, macroeconomic imbalances increased. A year ago the focus was on short-term risks on the liabilities side of the financial companies’ balance sheets, but now it has shifted more to the long-term asset quality. The most pressing economic policy task is to restore stability. The conclusion of large investments in the aluminium and power sectors will automatically reduce imbalances, but other adjustment has been slower than expected. Increased foreign debt service has delayed the unwinding of the current account deficit, which will hardly be brought down to a sustainable level without a substantial contraction in demand. The latest forecast in Monetary Bulletin in March 2007 indicates that such a contraction lies ahead, as growth of investment and private consumption slows down.