. i think in particular about high leverage levels and degrees of maturity transformation that rely heavily on short - term funding. a difficulty is that the crisis highlighted that some of those standard indicators tend to perform poorly or to suggest a lower level of vulnerability than it is actually the case. for example, when risk premium is low, financial institutions are encouraged to increase their leverage as their bets tend to look relatively less risky. in addition, haircuts on collateral tend to fall consistently with this view. this way, liquidity risk accumulates, and a change in market sentiment suffices to lead to forced asset sales on banks ’ leveraged positions. also, observing changes in collateralized lending practices and haircut levels are crucial indicators for assessing liquidity risk pricing, but this information tends to be viewed as proprietary by major market operators. at the bis central bankers ’ speeches micro - level, financial institutions are being required to enhance their funds - transfer pricing processes, which will be part of the liquidity management requirements i alluded earlier and that the bcl will announce in the coming months. the bcl is developing an operational framework for systemic and micro - prudential liquidity surveillance. as i have just illustrated, traditional tools for monitoring liquidity risk, while necessary, proved to be insufficient in the run - up to the crisis. the task of a liquidity risk supervisor is therefore not simple. the approach taken at the bcl strives to integrate the multiple facets of liquidity risk. however, to avoid the temptation to “ look at everything ”, the bcl approach is risk based. there is already convincing theoretical and empirical evidence that not only size, but also the degree of interconnectedness of banks via the interbank market, for example or the evolution of non - core liabilities constitutes good proxies for institutions ’ systemic risk. these characteristics, as well as the relevance of a given institution for the key role of the central bank in preserving financial stability, determine the set of financial institutions that are more often and more intensely monitored – classified in terms of their degree of systemic importance. a key qualitative component of liquidity surveillance in the bcl is the assessment of banks ’ liquidity risk management frameworks. as painfully learned from the crisis, this should be the first - line bulwark to defend an institution against liquidity risk. particular emphasis is being laid on issues such as sound governance both at the banking group and at the local level ; the definition of

thing is clear, however : for a period of time, we will need to maintain larger foreign reserves than we currently do. * * * the resurrection of the financial system is well advanced, and the capital base and ownership structure of the new banks have been determined. the next step is to complete the financial restructuring of the savings bank system. the minister of economic affairs has presented a bill of legislation on financial undertakings, which addresses a number of the shortcomings that emerged in their operations during the run - up to the crisis, including large exposures, related party lending, and owner eligibility. a number of projects must be tackled afterwards. the banking system is still too large for domestic needs. our financial institutions are operating in the shelter of capital controls, and the future arrangements for their links to foreign financial markets are still undetermined. furthermore, many domestic financial institutions have sizeable currency mismatches between their foreign assets and liabilities. this is risky and increases their need for capital. the financial institutions themselves will have to work diligently in order to reduce the imbalances in their currency composition, but because the hedge market is not functioning properly at present, it is possible that the central bank might assist them in repairing their foreign exchange balance through swaps with institutions that have an opposite mismatch. in addition, the bank will soon review its precautionary rules on financial institutions ’ liquidity and foreign exchange balance, in light of recent events. the central bank of iceland has collaborated with savings banks and the ministry of finance on a solution to the recapitalisation of the savings banks. the solution involves settlement of a large portion of the claims that the central bank received as compensation for deposits transferred to it, in accordance with the decision of the financial supervisory authority ( fme ) on the disposal of assets and liabilities of sparisjoðabanki islands hf. ( spb ) in march 2009. the settlement of the compensation has not been finalised, however, and the matter is still being considered by the financial supervisory authority. the central bank has concluded agreements with eight savings banks concerning the settlement of claims, and the agreements will be finalised soon after the financial supervisory authority and other creditors have confirmed them. i realise that it is painful for guarantee capital owners and creditors to lose these assets, which were deemed quite valuable before the crash and were perhaps purchased recently with borrowed money. nonetheless, it is necessary to face facts and try to salvage the