economic area ( eu + iceland, lichtenstein, and norway ), which gave banks headquartered anywhere in the region the right to operate throughout the region, and second, the prevailing global conditions of abundant, cheap credit. just before their failure, the icelandic banks had foreign currency balance sheets amounting to almost 7. 5 times iceland ’ s gdp, with a significant maturity mismatch between assets and liabilities. in comparison, the central bank of iceland ’ s foreign reserves amounted to 21 % of gdp. 4 these and other examples i could mention were accidents waiting to happen. and happen they did in the autumn of 2008, when, during the panic that gripped markets after the collapse of lehman brothers, there was a full - scale run on cross - border banks ’ foreign currency liabilities. what prevented the ensuing international dollar shortage from triggering a widespread failure of internationally active non - us banks to deliver on their foreign currency payments were major lolr operations in foreign currency, using countries ’ reserves and, more importantly, us dollar swap lines granted to central banks around the globe on a large scale. strictly speaking, a currency swap between two central banks is a symmetric agreement. in most cases, however, it is the central bank providing the reserve currency in excess demand at the time that is the party putting real money on the table. when the swap is used to lend to banks in the receiving country, that country ’ s central bank bears the counterparty risk. but from a liquidity standpoint, the foreign central banks were intermediaries of the federal reserve ’ s global liquidity operations. and so the lolr function at the national level was replicated at the global level. 5 does this mean that we have a solution to the problem of mitigating the extra risks in crossborder banking compared to national banking? unfortunately not. first of all, there are big question marks over central bank swaps as permanent and widespread tools of crisis prevention and management, as i will come back to later in my speech. second, the failures this case is described in ingo fender and patrick mcguire, “ european banks ’ u. s. dollar funding pressures ”. bis quarterly review ( june 2010 ) : 57 – 64. guðmundsson and thorgeirsson describe the case of the icelandic banks and draw lessons for cross - border banking : mar guðmundsson and thorsteinn thorgeirsson. “ the fault lines in cross - border banking : lessons from the icelandic case

mar guðmundsson : cross - border banking – where do we stand? speech by mr mar guðmundsson, governor of the central bank of iceland, at the eleventh asia - pacific high level meeting on banking supervision, manila, 11 february 2015. * * * chairmen and distinguished participants, i would like to begin by thanking the organisers for inviting me to address this impressive meeting. i spoke in this forum in tokyo in 2009. the title of my presentation then was the collapse of iceland ’ s cross - border banks : lessons for regulation, supervision and crisis management. the experience of the financial crisis in iceland was then fresh in our minds, and it was considered to be both an extreme and an interesting case. but now, after other cases have been better analysed and after the banking and sovereign debt crisis in the euro area, it is clearer that although there was a significant domestic element in the financial and economic crisis in iceland, the cross - border banking crisis aspect was to a significant degree an extreme manifestation of a global problem. that is partly why i want to take a more global perspective here today than i did in 2009 and ask where we stand with cross - border banking. to gain a clearer perspective on the big risks in recent forms of cross - border banking, it is useful to remind ourselves that fractional banking, with the associated maturity transformation, is inherently very risky. in national settings we learnt through trial and error over long periods how to design a safety net around the banking system in order to mitigate it´s inherent instability. the bank of england was at the forefront in learning how bank runs could be contained through lending against collateral to banks that were presumed to be solvent. 1 deposit insurance was introduced later, both as an additional mitigating device against runs and as a consumer protection device. in order to operate this system, it was necessary to have an assessment of the state of health of the banks. it was also necessary to mitigate the moral hazard introduced by the safety net. thus banking supervision initially emerged mostly as part of central banking, although the legal powers were initially often on a weak foundation. 2 finally, bank resolution schemes were needed to efficiently clean up any mess that might occasionally be made and limit contagion from individual bank failures to the system as whole. in many advanced countries, this system worked so well that the memory of bank runs had faded. perhaps this is why, when i last saw the musical about mary poppins in a theatre