fourth quarter of 2008. that autumn, two separate but interrelated sub - stories of the recent icelandic saga converged in a tragic grand finale. these are : 1. iceland ’ s boom - bust cycle and problems with macroeconomic management in small, open, and financially integrated economies. this is a story that has played out many times around the globe, and many of its elements have been seen before in iceland. it might have been somewhat more extreme this time around, but it wasn ’ t fundamentally different. 2. the rise and fall of three cross - border banks operating on the basis of eu legislation ( the european “ passport ” ). this story was much more unique, as it involved the first banking crisis in europe since the eu single market was formed in the early 1990s. the combined balance sheet of these banks was 10 times iceland ’ s gdp, and their combined bankruptcy, measured by the size of balance sheets, ranks third in size in the international history of corporate failures. and this happened in a country that ranks among the smallest in the world! we are still dealing with the repercussions of it, as can be seen in our overblown and unbalanced iip and the controls on capital outflows. before the collapse, the banking system had expanded very rapidly, growing in just five years from a combined balance sheet of less than 2 times gdp at the end of 2003 to the bis central bankers ’ speeches aforementioned 10 times gdp. most of this expansion was cross - border, and a significant part of it was really off - border, having little to do with iceland, as both financing and investment took place abroad. around two - thirds of the balance sheet of the three crossborder banks was denominated in foreign currency. as is typical for banks, the fx part of the balance sheet had a significant maturity mismatch. however, there was no safety net of the type that we have in a national setting to back it up. this turned out to be the fatal flaw in the whole setup, although we now know that these banks were also undercapitalised, which might have done them in at a later stage. but so were also several european banks that were considered solid at the time! in the panic that gripped global financial markets after the collapse of lehman brothers, iceland ’ s big banks were faced with a wholesale run on their foreign currency liabilities and were therefore heading towards a default on those liabilities in the absence of lolr

bank of iceland has been provided with the same mechanisms as central banks in most industrialised countries for creating such an environment. the central bank takes this role seriously and will strive to fulfil the conditions laid down by the new legislation and in the joint declaration which it issued with the government on march 27. the global economic climate has been dramatically transformed in recent years and is still changing in the wake of the terrorist attacks on the usa on september 11. it is quite obvious that we in iceland do not carry much weight in global economic terms. however, the situation in our immediate environment, especially among our main trading partner countries, is crucial to us. at the moment we are having a somewhat stormy ride. in this new environment, the role of everyone involved in economic policy - making in iceland will be to act in a disciplined and responsible fashion. doing so will be the main way to contribute to economic growth and prosperity in iceland.