That story, at least for smaller countries, is somewhat more unique than the first. However, it must be remembered that although these two stories differ, they interact in important ways. Thus the unsustainable boom that Iceland experienced during the years 2005–2007 was fuelled by a combination of favourable external conditions, macroeconomic mismanagement, and aggressive domestic bank lending. 3  An English version of the SIC report summary can be found on the Althingi website: http://sic.althingi.is/. For my views on the subject, I refer you to a speech I made in Bergen early this year: http://www.sedlabanki.is/lisalib/getfile.aspx?itemid=7592 and my speech at the Annual General Meeting of the Central Bank of Iceland: http://www.sedlabanki.is/lisalib/getfile.aspx?itemid=7699. BIS Review 63/2010  3  As so often occurs in great tragedies, the two stories converged in a grand finale in early October 2008, when nearly nine-tenths of Iceland’s banking system collapsed when its three large cross-border banks – Glitnir, Landsbanki, and Kaupthing – were taken into special resolution regimes on the basis of the emergency legislation that had just been passed by Parliament. This added significantly to the recessionary forces that were already at play in the Icelandic economy as the macroeconomic imbalances created in 2005–2007 subsided. However, the question of cause and effect is still open; i.e., what is the specific contribution of the banking collapse over and above an international recession and a domestic macroeconomic adjustment?

Implementation of Basel III for liquidity ratios by parent banks may have implications for domestic banks and monetary policy implementation in our countries. The liquid assets of our domestic banks are composed at large portion of domestic CB-bills and T-bills and accordingly, they are without investment rating (S&P BB with stable outlook; Fitch BB+ with sable outlook). This could cause serious disruption of design and effectiveness of monetary policy. Possibly, it could ask for transition from market based instruments to direct measures -such as reserve requirement. Another challenge is to straighten the coordination with the home-host supervisory authorities. It is extremely important and central to the country’s financial stability. NBRM is adequately included in the operation of some of the supervisory colleges, but not for all  2  BIS central bankers’ speeches  Macedonian subsidiaries of foreign banks. As a result, NBRM is not always adequately informed, which could harm its ability to effectively determine the necessary capital level of these banks. In addition, there are still some unresolved gaps in regulatory coordination between home and host countries in the EU Single Supervision Mechanism. And last but not least, the future challange will be impact of Single Resolution Mechanism for a European banking union to our banks and the prospective scaling-back of unconventional monetary policy that could affect the borrowing costs. Summing up, the ongoing international regulatory reform, though primarily intended to promote financial stability, may also have some unintended adverse effects on emerging and developing economies, with SEE region not being an exemption.