on and explanations of the developments in certain areas, such as liquidity, funding, changes in lending and deposits, asset sales, etc. the banks were urged to show restraint and downsize, and to follow that up, the central bank specifically collected information from them on their downsizing efforts. they realised, of course, that they were in a tight position, and they responded by selling assets and discontinuing selected activities in a number of countries, among other things. kaupthing bank ’ s decision to abandon its plans to acquire nibc in the netherlands was very important in this regard, not just for kaupthing itself but for all of the banks. the central bank supported all of these actions wholeheartedly ; however, it did not have the statutory authority power to force the banks to change their conduct. it is known that the central bank expressed its growing concern over the position of the banks during meetings with governmental authorities. early last year, the central bank ’ s concern centred not least on the banks ’ large near - term refinancing requirement for the coming years, which i have already mentioned, and the opinion, expressed by leaders of a number of international banks, that the global credit crunch was unlikely to ease in the foreseeable future. the central bank feared that credit markets could remain closed to icelandic banks for some time to come. although various explanations have been given for the swift rise in the icelandic banks ’ cds spreads, first in early 2008 and again that summer, it is perhaps possible to claim that the most important explanation lay in growing scepticism about the banks ’ ability to obtain the medium - term funding they needed for refinancing purposes. in late 2006, the central bank had doubled its foreign exchange reserves through an international treasury bond issue the proceeds of which were deposited with the central bank. early in 2008 it began preparing to fortify its reserves still further, as is explained in a memorandum published on the central bank ’ s website in october 2008. 21 raising the foreign reserves was deemed important in order to bolster confidence in the icelandic financial system and thus to facilitate its adjustment to a new reality. currency swap agreements with three nordic central banks were announced in may 2008 and renewed towards the end of the year. no other central banks apart from the nordic ones were prepared to lend their support in 2008, in spite of the central bank ’ s requests and in spite of the public declarations from the international community, including the financial stability forum

ingimundur friðriksson : the banking crisis in iceland in 2008 paper by mr ingimundur friðriksson, governor of the central bank of iceland, prepared for a seminar which was scheduled to be held at the bank of finland, 6 february 2009. the author was unable to attend. * * * iceland has been hit extraordinarily hard by the financial crisis that has swept across the globe. the rapid growth of the country ’ s financial system in the past few years rendered it much more vulnerable to global developments than it would otherwise have been. in my talk today, i would like to trace in broad terms various aspects of the runup to the icelandic banking crisis, particularly from the point of view of the central bank. it will not be a complete picture. after iceland ’ s banks were fully privatised early this century, they began expanding at a rapid pace, with the primary focus of that growth outside iceland. they acquired financial companies in other countries, opened branches, and expanded their international business from their headquarters in reykjavik. this rapid growth was facilitated by iceland ’ s membership in the european economic area ( eea ) through which the country had created for its financial system a regulatory framework that was rooted in the directives adopted by the european union. among other things, this meant that operating licences granted to icelandic financial companies extended not only to iceland but to all other eea states. for example, they were permitted to operate branches anywhere in the eea. the european regulatory framework gave the icelandic banks the same operational flexibility all over the eea as they enjoyed in iceland. they had the same rights and responsibilities as banks in all of the other eea states. the icelandic financial supervisory authority based its operations on european law, regulations, and procedures, and was given good marks by rating agencies and the international monetary fund. but the regulatory environment was by no means the sole factor allowing the banks to expand to the degree that they did. during the early years of the 21st century, the situation on the global financial markets was highly unusual. the supply of credit was virtually inexhaustible and interest rates lower than they had been in a hundred years. financial markets were hungry for bonds, including those issued by iceland ’ s banks, which were a welcome addition to many of the structured securities that became so popular. the banks were thoroughly scrutinised by international rating agencies and their favourable credit ratings greatly facilitated the banks ’ foray into