to the economy and financial markets, to mediate credit and payments, and to redistribute risks appropriately. in other words, it is capable of performing its function in an orderly and efficient way. iceland ’ s banking system meets the demands made of it and performs well on stress tests conducted by the central bank and fme. table 1 main vulnerabilities risk explanation exchange rate developments macroeconomic imbalances are pronounced. the current account deficit poses the risk of a depreciation of the krona. shifts in carry trades and other exposures could catalyse a sudden turnaround. the fx market relies on three market makers and is still relatively thin. some borrowers from the commercial banks have little or no hedge against exchange rate movements. global interest rates and in recent years, interest rates and premia have been at a historical low. premia interest rates have begun to climb and sooner or later premia will rise again, increasing corporate financing costs. terms of trade export prices could drop and oil prices rise. unfavourable developments could widen the current account deficit and erode national income. economic and social infrastructure is sound. the central bank ’ s macroeconomic forecast assumes a deterioration in the terms of trade. international market high dependence on market funding and deposits on call makes credit funding ratings and global market conditions crucial for the commercial banks. experience shows that credit assessment can shift suddenly. asset quality of rapid credit growth often eventually leads to poorer loan quality. loans commercial banks with equities as collateral are substantial. prices of equities and real estate are buoyant. although arrears and impairment are at a low, they are unlikely to remain so over the next few years. table 2 resilience resilience explanation economy the economy is flexible and in the past has shown itself capable of tackling cyclical swings through adjustment of imports. investment and output growth have been robust. the long - term economic outlook is favourable. strength of the commercial banks the commercial banks ’ liquidity and capital ratios have never been higher. they have built up liquidity in foreign currency and secured refinancing into 2008. profitability is strong from the bank ’ s diverse operations and assets are diversified. institutional and supervisory framework iceland ’ s framework is the eea agreement and its guidelines are international best practice and transparency. economic and social infrastructure is sound. financial supervision has been boosted and extensive cross - border cooperation is in place. payment and settlement systems payment system infrastructure

the bank and benchmark reform speech given by chris salmon, executive director, markets, bank of england roundtable on sterling risk - free reference rates, london 6 july 2017 i would like to thank tim taylor and rob harris for their help in preparing these remarks. all speeches are available online at www. bankofengland. co. uk / speeches introduction thank you to natwest markets for hosting this event, and let me add my own welcome and thanks to you all for coming. the governor has set out the need for a substantial transition from libor to near - risk free alternatives. i want to expand on his remarks by explaining what the bank has been doing to advance this objective, and why. and, importantly, looking ahead, i want to highlight the need for action from many of you. the financial system has a libor dependency but let me first paint a picture of where we are starting from. the financial system has a libor dependency. i ’ m sure this won ’ t be news to you, but it bears some examination. usage of term libor – that is the 3 - month and 6 - month tenors – is widespread, especially in sterling and us dollar markets, but also in japanese yen and swiss franc. the greatest concentration of financial contracts referencing libor is in derivatives markets. for example, in sterling, more than £30 trillion of ‘ over - the - counter ’ derivatives and £4 trillion of exchange traded derivatives ( on a gross notional basis ) reference libor. usd libor derivatives probably run to the hundreds of trillions. the economic purposes of these contracts include hedging or gaining exposure to : outright interest rate risk, basis risk, cross currency risk, and interest rate volatility. banks, pension funds, insurers and hedge funds are all heavy users of libor derivatives. libor is also important for the real economy in the uk, with more than £200bn of sme and corporate loans, around £125bn of floating rate notes and £200bn of structured debt referenced to sterling libor. libor ’ s role here is typically to provide a transparent and widely accepted reference point for the floating interest payments on loans. the dominance of libor might be taken as evidence of the overwhelming need for libor - linked financial contracts. however i do not believe this is the case. a large part of the reason libor is so widely used is due to what economists call network effects. using libor