davið oddsson : review of recent economic and financial developments in iceland address by mr davið oddsson, chairman of the board of governors of the central bank of iceland, at the bank's annual meeting, reykjavik, 30 march 2007. * * * chairman of the board of governors, prime minister, ministers of government, ladies and gentlemen : on behalf of the board of governors i welcome you all to this, the 46th annual meeting of the central bank of iceland. at the bank ’ s last annual meeting it was announced that the government of iceland and the central bank had been in consultation on the need to boost the bank ’ s foreign reserves substantially and also to improve its capital position. their motivation for doing so was not, however, that either position had weakened, nor that the bank no longer met the benchmarks for capital and foreign reserves. for a long time the minimum foreign reserve has been set at an amount equivalent to three - months ’ imports, and this level has always been ensured. however, the major changes – which could even be called revolutionary – that have taken place in iceland ’ s financial sector over a relatively few years prompted the board of governors to regard it as prudent to take other factors into account, such as the size and scope of the financial sector. as far as the capital position is concerned, it can be said that clear guidelines are to be found in recent legislation on the central bank. the clause in the law dealing with the transfer to the treasury makes some for provision for whether the bank ’ s capital has reached a specified minimum relative to the size of the domestic credit system. the central bank act states that an amount equal to two - thirds of the central bank ’ s profit shall be paid annually to the treasury. however, the bank pays only one - third of its profit to the treasury if its capital is equivalent to less than of 2. 25 % of the amount of lending and domestic securities in the credit system. at present the bank ’ s capital is still a long way short of this legal reference level, and its annual profit will not suffice to strengthen it markedly anyway. growth has not only soared in the icelandic credit system, but on an increasing scale each year has also been associated with foreign markets, where credit institutions ’ activities have expanded enormously. these changes also give grounds for considering other terms of reference for foreign reserves than import levels alone. as the prime minister stated in his speech earlier, the government responded positively to

ingimundur fridriksson : turbulence in iceland's financial markets in 2006 keynote address by mr ingimundur fridriksson, governor of the central bank of iceland, at the ubs conference “ annual reserve management seminar for sovereign institutions ”, thun, switzerland, 4 june 2007. * * * where is iceland? what is it? why do we want to know about it? in the first half of 2006, hardly a day passed without iceland and icelandic banks being mentioned in newspapers and financial journals around the world. although attention is often welcome, this was not necessarily true of all the discussion about iceland and its banks a year ago. the coverage was highly critical, in some ways rightly so but in other ways not. when i was asked to address this conference, the turbulence in the icelandic financial markets in the first half of 2006 was doubtless fresh in the organisers ’ minds. so i was asked to discuss that episode and how the central bank of iceland monitored it and responded. as well as covering this topic i shall add some comments on recent developments and prevailing conditions. but first a few facts and a brief description of the background are needed. iceland is an advanced industrial economy with one of the highest national incomes per capita in the world. through membership of the european economic area, iceland is part of the european single market and has the same financial infrastructure as in the european union. the icelandic economy has witnessed huge changes in recent years following the deregulation of cross - border capital movements in the 1990s and market liberalisation. in the 1990s, the central bank of iceland adhered to a fixed exchange - rate regime with tolerance limits, which was supposed to provide an anchor for the core policy of keeping inflation under control. the arrangement was successful then and for much of that decade inflation in iceland was close to or below the oecd average. over time it became increasingly clear that a fixed exchange rate was incompatible with full deregulation of capital movements. bearing this in mind and because a floating exchange rate would arguably suit the icelandic economy better, the tolerance limits were extended in phases from 2. 25 % at the beginning of the 1990s to 9 % early in 2000. in the course of the 1990s, an episode of overheating began. it originated in a massive increase in foreign investment in the aluminium sector but gradually became driven by private consumption. inflationary pressures amplified and the current account deficit widened sharply to 10 % of gdp in 2000. market expectations