an unsustainable external position developed, as could be seen in a double - digit current account deficit. and macroeconomic and prudential policies were not up to the task. quite the contrary : there was a policy conflict between monetary policy and the demand levers pulled by the government, and the risks inherent in capital flows, fx balance sheets, and credit and asset price booms were left under - regulated and insufficiently supervised. the second story was the rise and fall of three cross - border banks operating on the basis of eu legislation ( the european “ passport ” ). this story was much more unique, as it was part of the first banking crisis in europe since the eu single market was formed in the early 1990s. this framework, along with the prevailing conditions in international financial markets that provided for ample and cheap credit, facilitated the cross - border expansion of the newly privatised icelandic banks. in less than five years, from the end of 2003 to mid - 2008, the combined balance sheet of these banks went from under two times gdp to almost ten times gdp, topping other small european countries with international financial centres, as can be seen on figure 1 : bis central bankers ’ speeches towards the end, around two - thirds of the combined balance sheet of the three cross - border banks was denominated in foreign currency. on the liabilities side, the share of fxdenominated debt was actually higher, as can be seen on the right side of the slide, with almost half of the financing in the form of fx deposits and other short - term fx financing. the fx part of the balance sheet therefore had a significant maturity mismatch. however, there was a very limited safety net of the type we have in a national setting, in the form of liquidity provision and lender of last resort ( lolr ) to back it up. it was an accident waiting to happen, and happen it did, with a vengeance, at the peak of the international financial crisis in autumn 2008, when there was a wholesale run on the fx financing of internationally active banks. after having done a post mortem on the failed banks, we now know, however, that they also had other ailments that would probably have done them in at a later stage, although the process might have been somewhat less disorderly. the combination of the macroeconomic imbalances, an unsustainable banking system, and the full eruption of the great financial crisis meant that iceland faced unprecedented

few commentators have argued that we have overestimated the risks associated with such lending, or that reducing risks is not a worthwhile endeavour. instead, most of those that criticise the measures appear to feel that they are disproportionate, that is, given their benefits in terms of risk reduction, they have too detrimental effects on the property market. in principle, that is a reasonable argument to which i will now turn. direct effects unfortunately, it is still too early for a careful review of the direct effect of the rules – which works through banks ’ lending practices – on the property market. that is so for three reasons. first, the measures were introduced only nine months ago, in february 2015. therefore, any data concerning new lending in h1 2015 will mostly contain mortgages that were approved prior to the introduction of the regulations, given that banks allow approvals to last up to nine months. indeed, it may well be that these measures have only started to affect lending recently. consequently, it will take some time before new lending consists entirely of loans falling under the scope of the regulations. second, banks ’ compliance with the measures will only be assessed after lending data for the period to end - december 2015 has been submitted. before that date we will have no hard evidence on how the measures have impacted on bank lending. however, if anything, my suspicion is that banks, not unexpectedly, might have needed some time to become fully acquainted with the rules and to introduce them in their lending practices. we will know more in a few months ’ time. third, it is important to note that in 2013, lti ratios at or below 3. 5 were the norm and comprised around 83 per cent of new lending. similarly, lending at ltvs greater than 90 per cent was circa 15 per cent of all new lending in 2013. thus, the measures were broadly compatible with actual lending practices and therefore unlikely to have large immediate effects on credit availability. however, as the percentage of loans with an ltv ratio between 80 – 90 per cent was increasing and rapid house price growth was emerging, the introduction of the measures was timely. overall, it is clear that any review of the measures themselves can only be carried out once sufficient time has passed for us to have the necessary data to analyse their effects. it is also worth recalling that while there is flexibility to recalibrate the measures if necessary, they are bis central bankers ’ speeches designed to be permanent features of the regulatory landscape