of it had very little to do with iceland, as both financing and investment took place abroad. there were indeed important domestic factors behind this expansion. one was the privatisation of the icelandic banking system in the early 2000s, which was carried out in a manner that placed the country ’ s largest banks into the hands of risk - loving investment bankers and the ill - founded promotion of “ financial centre iceland ”. on the other hand, it is hard to imagine that this scenario could have played out as it did without the worldwide glut of cheap credit in the years before the global financial crisis and iceland ’ s position as a party to the eea agreement, which provides for a legal and regulatory framework based on european union directives, including free movement of capital and provision of financial services. the underlying principles are those of home licensing for operation throughout the eea and 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. we know now that there were and are deep flaws in this framework : flaws that are important elements in the current eurozone crisis. a key issue here is the dichotomy between bis central bankers ’ speeches european passport rights, on the one hand, and national supervision, national deposit insurance, and national crisis management and resolution regimes, on the other. this is what recent proposals of a banking union are supposed to deal with. but then, for eea countries outside the euro area, this framework entails potentially enormous foreign currency liquidity risk in the banking system that is not covered by a lender - of - last - resort ( lolr ). this was a key element in the icelandic banking crisis and must be addressed in future reforms of the system. let me now say a few words about iceland ’ s crisis and recovery. the shocks hitting iceland in 2008 were mitigated by the policy response, which had two focal points. first, immediate crisis management was based on several key goals : keeping domestic payment systems up and running, preserving common citizens ’ access to their deposits, and ring - fencing the sovereign against the failing private banks. the tools used were to declare all deposits in iceland safe and to carve domestic banks ( 1. 7 times gdp ) out of the failing banks. second, iceland went on a programme with the imf, which had three main goals : stabilising the exchange rate

technology and financial innovation, and strong arguments were being made to the effect that open capital accounts would bring significant benefits. after all, ongoing real economic integration at a global level demanded at least some degree of global financial integration. in turn, freer capital movements, the ongoing cross - border financial integration, and the growth of private capital flows that followed undermined pegged exchange rates and thus contributed to the spread of flexible exchange rate regimes and inflation targeting in many parts of the world, but in the european union this development provided part of the rationale for a monetary union. the current international monetary system and the official part of the global financial safety net largely reflect the contours of the global economy as they were before global financial integration and private capital flows reached the level we have seen in this century. back then, the global macroeconomic problem was related to global current account imbalances and asymmetric adjustment. keeping your own house in order was in most cases both necessary and sufficient for maintaining economic stability in individual countries. imf facilities to lend to sovereigns of debtor countries facing balance of payments difficulties were the most important part of the global financial safety net ( gfsn ). the world we currently live in is different. financial imbalances in both net and gross balance sheets can be more important than current account imbalances and certainly were so in the build - up to the great financial crisis ( gfc ). this is a world of cross - border spillovers and spillbacks. it is a world where, for small and open economies ( soes ), keeping your own house in order is certainly necessary but no longer sufficient, at least not if we restrict ourselves to traditional demand management and prudential instruments. financially integrated small and open economies can still be overwhelmed by large and volatile capital flows driven by push factors. it is a world that needs additions to the gfsn, some of which we partly have – such as fx liquidity provisions to internationally active banks through central bank - swaps – but some of which we do not have. the international community is certainly aware of these issues. the imf has done good analytical work in this area and proposed reforms. work has been done under the auspices of the g20 looking at potential reforms to the international monetary sytem ( ims ), and currently the eminent persons group is working on a report to the g20 to be delivered at this year ’ s autumn meetings of the imf. but progress in