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 UK’s financial sector can be both a global good and a national asset – if it is resilient. It is not for the Bank of England to decide how big the financial sector should be. Our job is to ensure that it is safe. The UK can host a large and expanding financial sector safely, if we implement a reform agenda that extends well beyond domestic banking. That is not to suggest that the focus on reforming domestic banks has been misplaced. Following the crisis, it was imperative to fix first the fault lines at the core of our system, with initiatives ranging from rebuilding the capital of major UK banks and building societies, to changing the structure of compensation and the responsibilities of senior officers. In tandem, some major banks are working to change their cultures.6 But reforms of domestic banking are far from sufficient for a global hub like London. Now is the time for a greater focus on what’s needed for resilient international banking and robust global markets. This will require sustained international engagement. Unlike in the early days of the FT, the UK can no longer dictate standards. Rather than ruling the waves, we must spur collective action through a demonstrated commitment to openness and the promotion of better ideas in Europe and at the G20 via the Financial Stability Board (FSB).