the outstanding foreign - denominated loans taken to finance them – by 65 b. kr. as of the end of february. but we mustn ’ t rest on our laurels ; we need sizeable reserves as we prepare to lift the capital controls. i mentioned uncertainty surrounding the estimation of potential fx outflows once the controls are lifted. but one thing is certain : if the failed banks ’ estates were given a green light tomorrow and could convert all of their kronur to foreign currency, and the same happened with the offshore overhang, there is no way we could safeguard stability, let alone bolster confidence, except perhaps after a long time has elapsed. the central bank of iceland has designed a model intended to assess the impact of various developments in the balance of payments over a long horizon, including capital account liberalisation measures. when applied to this instance, the model reveals that our entire foreign exchange reserves would be wiped out – and more besides – if they were used to shore up the exchange rate. this would never be done, of course, and therefore the currency would depreciate sharply. it is clear that if residents were free to exit at the same time, they would participate in the run on the currency, and confidence would evaporate quickly, leaving us with a new currency crisis to grapple with. of course, this is an extreme scenario in some respects, as the estates ’ isk assets, for instance, are not all liquid at this point in time, and a portion of the offshore kronur could be patient capital. but it gives an indication of the kind of problem we are dealing with. therefore, we need other solutions that safeguard stability and prevent additional burdens from being placed on the sovereign or the icelandic people. such solutions do exist, and a large group of experts – foreign consultants ; the task force for capital account liberalisation, which works for the steering committee on the capital controls ; and experts from the central bank and the ministry of finance and economic affairs – has been working hard on developing them in recent months. i would like to take a moment now and thank all of these people for their tireless efforts and excellent work. it would be premature to publicise solutions at today ’ s meeting. moreover, it is not within my purview to do so on my own. the liberalisation of the capital controls is a collaborative project undertaken by the central bank and the government, which actually means that elected representatives

crisis, and the tendency in iceland both to adopt international and eu regulations without critical analysis of iceland - specific risks and to base supervision to a significant degree on mechanical checks of adherence to those regulations. let me expand a bit on the eea part, as it is highly relevant to my topic. the eea agreement provides a legal and regulatory framework based on european union directives, including a framework for free movement of capital and provision of financial services. the underlying principles are those of home licensing for operation anywhere in the area and of a level playing field for competition where size and location are not supposed to matter. this european “ passport ” enabled the icelandic banks to operate throughout the eea, including through branches in other eea countries. some of the topics discussed in this speech are dealt with at greater length in the following two sources : gudmundsson, mar & thorsteinn thorgeirsson ( 2010 ). “ the fault lines in cross - border banking : lessons from the icelandic case. ” suerf studies – 2010 / 5 contagion and spillovers : new insights from the crisis. on - line source : http : / / suerf. org / index. php? option = com _ k2 & view = item & id = 177 & itemid = 133 and gudmundsson, mar ( 2010 ). “ the fault lines in cross - border banking ”, speech at the fibe meeting in bergen on 7 january 2011. on - line source : http : / / www. bis. org / speeches / sp0702525. htm bis central bankers ’ speeches i will discuss the flaws in this setup as regards banking later in my remarks, but in order to provide a proper perspective on the story, i must make two points. first, it goes against the grain of the underlying principles of the european passport to consider the size of banks relative to gdp as a metric for concern, as is now rightly in fashion. second, we should see this more in the nature of a necessary rather than a sufficient condition, and it does not exonerate icelandic banks and authorities of blame for their part in the story. the financial crisis revealed major fault lines in cross - border banking, the most important being large foreign currency balance sheets with significant maturity mismatches but with limited lender of last resort facilities in foreign currency. the nature and magnitude of this phenomenon were not well understood before the crisis. 2 maturity mismatches are, of course