forces and competition from abroad and a monetary regime bent on securing a low rate of inflation was chosen. iceland is, as mentioned, not a member of the european union and membership is not on the agenda of the present government. iceland operates its own small currency on the margins of the us dollar and the euro. these facts place firm requirements on economic policy while at the same time offering iceland to reap important benefits from globalisation. this is indeed born out by developments over the last few years that were years of rapid growth of gdp and years which tested the ability of economic policy makers to steer the economy in an environment of liberalised markets and capital movements. more generally, the lesson to be drawn from our experience is that countries only stand to gain from full participation in the global economy. aside from subjecting the domestic economy to competition from abroad, it disciplines economic policymaking. the market is a strict master and serves painful punishment for mistakes or ill - thought initiatives.

mar guðmundsson : capital flows and systemic risk in iceland panel comments by mr mar guðmundsson, governor of the central bank of iceland, in norges bank's ( central bank of norway ) 200th anniversary symposium, oslo, 16 june 2016. * * * in my short introductory remarks, i would like to discuss what i consider to be one of the key factors behind the financial crisis in iceland : the interaction between capital flows and systemic risk. i will focus in particular on those aspects that have more general relevance and herald unsolved problems for economic management and financial stability in small, open, and financially integrated economies ( sofies ), such as iceland was before the crisis and now strives to be again, at least up to a degree. the saga of iceland ’ s experience during the great financial crisis had two separate but interrelated sub - stories. the first story was related to iceland ’ s boom - bust cycle and problems with macroeconomic management in small, open, and financially integrated economies. this is a story that has played out many times around the globe, and many of its elements have been seen before in iceland. it might have been somewhat more extreme this time around, but it wasn ’ t fundamentally different. strong capital inflows that met with an insufficient policy response and contributed to huge imbalances in the domestic economy were a key part of the story. i will come back to this later. 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. taking advantage of this framework and the prevailing international conditions of ample and cheap credit, these banks grew phenomenally, in less than five years, to almost ten times iceland ’ s gdp, with most of the expansion being crossborder – or maybe more aptly put, off - border, as the bulk of both financing and investment took place abroad. the result was very big fx - denominated balance sheets with the usual maturity transformation that banks, as we know them, are all about. however, the safety net that we have in national settings to back them up, including lolr facilities, was not there. it was an accident waiting to happen, and so it did. i will be very brief on how the failure of these cross -