mar guðmundsson : the evolving structure of the post - crisis financial sector speech by mr mar guðmundsson, governor of the central bank of iceland, at the 3rd annual palm beach strategic forum, palm beach, usa, 8 april 2013. * * * i am both pleased and honoured to address you here today and would like to thank the organisers for giving me the opportunity to do so. this session is on global economic conditions and prospects. other speakers have covered the macroeconomic and monetary policy aspects of the topic. i will use my allotted time to focus mostly on the financial sector, but i promise to say a few words about iceland as well. there is, of course, an important link between the real economy and financial spheres. a broken financial sector is less likely to be able to finance the growth that we need. in many advanced countries, we are in the early phases of a deleveraging process where, to a varying degree, households, companies, sovereigns and financial institutions are – by force or by choice – reducing debt levels that have become either unsustainable or obviously too risky in the new environment. such generalised deleveraging can be a painful process, with a significant adverse effect on economic growth for a prolonged period, as former such episodes bear out. however, as i read the data, in many of our countries weak credit growth is due even more to limited credit demand than to supply. so if we were magically able to bring the financial sector back to full health and an optimal leverage ratio by tomorrow, we would not have solved the problem. significant debt problems would still exist for several sovereigns and several parts of the non - financial private sector. in addition, we would still have the confidence crisis that has been so pronounced in europe. so it is going to be a more protracted process. the eu has not resolved its crisis, although there has been progress in deleveraging and de - risking bank balance sheets. in september 2008, when i was still at the bis, i gave a speech in boston bearing the title : how might the current financial crisis shape financial sector regulation and structure? 1 i realise now how foolhardy that endeavour was because those were indeed early days. but still, many of the potential changes that i mentioned have stood the test of time, such as the inevitable deleveraging ; shifts in bank business models, especially on the funding side ; the need for bigger capital and liquidity buffers ;

might undermine the central bank ’ s independence. when thinking about the set - up of national fiscal stabilisation policy in a monetary union intended to create credibility, these five guiding principles – consistency, commitment, transparency and accountability, coupled with independence of policy makers – are a good starting point. fiscal stabilisation policy set - up turning to its design, three relevant questions provide a framework for discussing the set - up of a fiscal stabilisation policy regime for a country in a monetary union : what is to be stabilised, how should it be stabilized and who should do the stabilising? 6 addressing what is to be stabilised, two alternatives that were discussed in sweden were the output gap and the inflation rate. irrespective of what target is chosen, it should apply in the medium term, thereby allowing temporary deviations in the event of shocks hitting the economy. in the case of an this discussion is based on boije, borg and eklund ( 2002 ) and boije and shahnazarian ( 2003 ). inflation target, it should be designed in such a way as to take account of necessary changes in relative prices ; i. e. allowing for adjustments in the real exchange rate. different targets have different advantages and drawbacks. for our purposes, when discussing the framework, it is more important to stress that the motives and forecasts behind the stabilisation policy decisions should be presented in a clear and open fashion. in turn, this helps build credibility through accountability. how is the policy objective to be stabilised? when compared to monetary policy, fiscal policy has a wide array of possible instruments on both the expenditure and revenue side of the government budget. a possible approach is to consider what characteristics the instrument should have. preferably, the effect should be general and the measure should be used symmetrically and temporarily. furthermore, stabilisation policy should, as far as possible, be distinguished from distribution and allocation policy. proposals of such instrument could include personal income taxes, value - added tax and payroll taxes. this observation leads me to who should do the stabilising. although the arguments behind the delegation of monetary policy to independent central banks should presumably also apply to stabilisation policy in a fiscal policy regime, such an idea is currently quite far from being conventional wisdom. however, i argue that many of the decision - making problems that have been the basis for much of the academic criticism of fiscal policy stabilisation could be minimised if an