Most noteworthy to me is the fact that the regulatory regime that was in place in 2008 and 2009 was associated with an episode of the most illiquid market conditions since at least the Great Depression. A return to such a regime could lead to a higher cost for liquidity over the long-run. I think we are in a much better place today. We have a financial system that is much more resilient, and the available evidence suggests that this transformation has not resulted in any significant erosion in market liquidity. What future work is needed? There is a tendency to compress a complex world into a sound bite – such as, “tougher regulation is increasing the cost of liquidity and driving up liquidity risk.” Policy needs to be based on evidence and the available evidence supporting this claim is mixed, at best. Most importantly, I think it ignores the complex nature of the changes underway in financial markets. The methods of intermediation are changing and will likely continue to evolve. There are new players with different objectives and goals, and technology is evolving rapidly. These factors strike me as just as important as the increase in regulatory requirements for the large dealers. The recent work analyzing the October 15 Treasury market flash rally illuminates the complexity of today’s market structure.
The Programme gives investors the option of buying Icelandic krónur at the auction exchange rate (near the offshore rate) in order to invest in the domestic economy, provided they sell a corresponding amount of foreign currency in the domestic foreign exchange market. The Investment Programme, which was introduced in detail on 18 November, has been described elsewhere; therefore, I will not go into the fine print here. It is designed to be neutral vis-à-vis the foreign exchange reserves in the short term and positive in the long run. This is achieved by requiring that half of the currency used for the investment be converted in 2  BIS central bankers’ speeches  the domestic FX market and by stipulating a minimum holding period of five years for the investment. It is hoped that this will tie up a sizeable share of the most volatile offshore krónur. How large a share that is will depend primarily on the scope of the investment projects on offer and the actual amount of volatile krónur, both of which are quite uncertain. It is hoped that the Investment Programme will attract significant foreign investment. It is a misunderstanding, however, to assume that the Programme aims at releasing almost the entire stock of offshore krónur through foreign investment. This would require an investment that it is unrealistic to plan on in the next two years. On the other hand, it is realistic to expect to release the most volatile krónur in this way.