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

default on a loan can represent a serious burden for the party concerned or even a personal tragedy. to a certain extent, this explains the negative connotations associated with debt. however, from a macroeconomic perspective, default by a single borrower does not usually pose a problem. unless the single borrower happens to be a massively indebted state or big bank. an impending default by such a player has a far - reaching impact on the economy as a whole, as witnessed in the recent financial crisis. debt also becomes a macroeconomic problem when a large number of economic agents help themselves too generously at the credit buffet table. such phases of excess on the credit market usually end with a large number of borrowers encountering payment difficulties. for the rest of my presentation, i would like to concentrate on this type of debt crisis and on the costs involved. empirical literature indicates that recessions run particularly deep when they are connected with just such a debt crisis ( cf. slide 9 ). moreover, the subsequent economic recovery tends to be sluggish. this applies all the more when the debt crisis also hits the banking sector. 9 why is this so? in a debt crisis following a credit boom, not just a few, but a large number of households and companies face payment difficulties and have less income and assets at their disposal. accordingly, they need to scale down consumer spending and investments over a relatively long period of time in order to service outstanding loans and reduce their excessive debt burden. in addition, such an environment usually leads to greater uncertainty, which also impacts on economic agents that are not directly confronted by payment difficulties. under such circumstances, they, too, tend to show less appetite for consumer spending, investments and risk. 10 cutbacks in consumer spending and investments are even more pronounced when, at the same time, banks are busy cleaning up their balance sheets. they then become very restrained in cf. boissay et al. ( 2016 ), jorda et al. ( 2013 ), reinhart and reinhart ( 2010 ) and taylor ( 2015 ). cf. literature on debt overhang, e. g. buttiglione et al. ( 2014 ) and koo ( 2011 ). page 6 / 16 their lending. 11 this can even affect fundamentally profitable investments and borrowers with a high credit rating. all this places a burden on the economy not just during the acute phase of the crisis, but over a prolonged period. lower investment also results in lower growth