The banks are still operating under capital controls, and they have limited access to foreign funding. At this point, when the First Review of the economic programme of the Government and the IMF appears imminent, it is timely to begin lifting the capital controls. As the economy and financial system are rebuilt and conditions improve on the global markets, we expect that the Republic of Iceland will have access to foreign credit markets once again, and that the banks will follow in its wake. At that point, it will be more important than it is now to decide to what extent Icelandic financial institutions will be allowed to engage in international banking operations. In a sense, the financial crisis represented a run on such operations. The crisis revealed clearly the contradiction between the internationalisation of finance, on the one hand, and national supervision and safety nets, on the other. The problem was particularly prominent in the case of the EEA regulatory framework, which had gone farther in lifting restrictions on crossborder banking activities than was the case in many other parts of the world. In this context and others, it is important to bear in mind that international or pan-European regulatory provisions represent minimum requirements. Iceland and other nations may need to adapt those provisions to the specific risks that they face. In some areas, this may imply more stringent capital adequacy and liquidity requirements, or special restrictions on financial undertakings’ activities.
One of the roles of the Parliamentary Special Investigative Commission is to compile information on these topics and present an analysis of them. The Central Bank neither has the capacity nor the will to front-run that analysis. The Bank will probably need to revise its operational practices in these areas in view of experience and the Commission’s findings, as will other supervisory institutions. In addition, the Bank will soon review its precautionary rules, such as those pertaining to financial institutions’ liquidity and foreign exchange balance, in light of recent events. Various elements of payment intermediation and settlement will also be reviewed in the near future, with the aim of promoting financial stability more effectively. Because of the uncertainty still surrounding assets, capitalisation, and ownership of Icelandic financial undertakings, it is difficult to assess the main risks in Iceland’s financial system at this time. However, those risks are clearly related to asset quality, on the one hand, and foreign exchange and indexation mismatches, on the other. For this reason, among others, it is important that financial institutions maintain capital adequacy ratios well above the statutory minimum in the near future. At present, deposits form the backbone of the banks’ funding, as foreign investment in Iceland and access to global credit markets are limited. Lifting the capital controls entails a certain risk, partly because it involves liberalising capital flows while the ownership structure of the banks is still being clarified.