to a fixed exchange rate regime, as it was considered desirable that the krona should appreciate afterwards. this strategy was triggered by the currency crisis, which has sent the exchange rate far below the levels previously thought likely, let alone desirable, and by the large share of exchange rate - linked loans in private sector debt. the problem, however, was that achieving exchange rate stability with conventional tools, such as interest rates and foreign exchange market intervention, would require astronomical interest rates and / or larger foreign exchange reserves than iceland had, partly because of foreign investors ’ large holdings in kronur. as a result, it was decided to impose temporary capital account restrictions, in the hope that they would provide monetary policy with the elbow room to base its decisions on the slack in the economy while establishing exchange rate stability. another goal was to create some shelter for private sector debt restructuring. this strategy has delivered considerable results. the krona has been relatively stable since mid - 2009 and has actually appreciated a bit in recent weeks, although it has slid somewhat in the past few days. at the same time, the central bank stepped down its sales of foreign currency in support of the krona and has not intervened in the fx market since early november. in part, this is due to the fact that the krona was already very weak, and the underlying trade surplus has since provided the krona with a stronger foundation. but one cannot ignore the most important explanation : with the changes to the capital controls that were announced in end - october / early november 2009, and the expansion of the capital controls surveillance unit staff, the controls are finally working as originally planned. most important here is the fact that the link between the onshore and offshore markets for kronur has been largely disconnected. this also appears in a significant drop in inflation. in the first quarter of 2009, price levels excluding tax effects had risen by nearly 17 % year - on - year. the corresponding figure for the first quarter of 2010, however, is just over 6 %. in the absence of further shocks that weaken the krona once more, there is a very good chance that inflation excluding tax effects will be close to target by the end of the year. the central bank has cut interest rates substantially. the central bank interest rate that made the greatest impact on other rates was 17 % a year ago, when the bank held its 2009 annual general meeting. as of today, the corresponding interest rate – the average of current account rates and the highest cd rates

necessary in any good ratings system control structure : • the first is independence in the process of assigning ratings ; the people assigning ratings ( and even approving loans ) should be independent of the marketing department and revenue producers. • a second check is having a subsequent review of ratings by an independent review group. this group is charged with reviewing ratings after the fact - that is, after origination - for accuracy, timeliness and consistency. moreover, both the ratings system and individual ratings should be subject to review by the internal audit department. • a third and final critical element is transparency in the ratings process. here, what we would expect is that the ratings criteria are objective, and that the bank has in place policies and procedures that clearly document the rationale for each ratings category. the more transparent the process is, the easier it is for a third party to audit the ratings through some form of replication of the analysis. these three elements - independence of the ratings process, internal review of those ratings, and transparency - all contribute toward stronger controls over the ratings process. such controls over the risk ratings process must be complemented by the collection of good data on which to base those ratings, which is the third area of focus for banks. c. data requirements and validation clearly, a system is only as good as the inputs that go into it. accordingly, banks using the irb approach will need to be able to measure the key statistical drivers of credit risk. i would emphasize that the basel committee clearly recognizes that there is more than one way to accomplish this purpose. the minimum basel standards provide banks with the flexibility to rely on data derived from experience, or from external sources, as long as the bank can demonstrate the relevance of the external data to its own exposures. regardless of source, high quality data are critical for formulating meaningful internal risk assessments. from a broader risk management perspective, access to such data will enable a bank to evaluate the performance of its internal rating and risk estimation systems in a consistent and meaningful manner. the basel standards outline the data history banks will need in order to use the irb approach. the committee recognizes that banks may not currently have all of the required information on hand. for this reason we have continued to engage market participants in a dialogue on this issue. as implementation of the new accord approaches, we encourage banks to consider their data needs very seriously and to comprehend fully the techniques they will need to use to derive appropriate estimates of loss based on those data. in