And it means we have to understand the dynamics and interrelationships of markets; how new products work; and the possible behaviour patterns of intermediaries, investors, and borrowers. Above all we need to be focused on where major risks are most likely to emerge and the market dynamics if those risks start to crystallise. And we need to distinguish those which are systemic from a myriad of fascinating developments, many of which are just “noise” but which could otherwise distract us. b)  Risk Reduction: Oversight of Payment Systems  The second area where we, and typically other central banks, are required to perform is oversight of payment systems. Payment systems facilitate economic transactions of goods, services and financial assets and are an essential component of a well functioning financial system. So reduction of risks in these systems, for example through the introduction of our Real Time Gross Settlement system, is clearly a priority from a systemic perspective. c)  Provision of Liquidity and Preparation for a Financial Crisis  And thirdly the MoU stipulates that we need to be in a position to inject liquidity at all times. This means that we must be able to provide liquidity in normal times, as well as in times of stress or crisis. This puts an increased onus on well developed and tested crisis management plans, and a particular focus on ensuring that we are able to undertake a range of official financial operations in exceptional circumstances. 4.
Már Guðmundsson: Managing capital flows in a financially integrated area – lessons from the Icelandic financial crisis Remarks by Mr Már Guðmundsson, Governor of the Central Bank of Iceland, at a conference organised by the International Monetary Fund, Bank of Estonia and Sveriges Riksbank on Nordic-Baltic financial linkages and challenges, Tallinn, 13 December 2013. *  *  *  Accompanying charts can be found at the end of the speech. I would like to thank Eesti Bank, Sveriges Riksbank, and the IMF for inviting me to speak at this most interesting event. In my remarks, I will focus on those aspects of the Icelandic financial crisis that are most closely associated with the topic of this session, which is financial integration. I will draw out some salient features of that story and then link them to several lessons that might be of more general relevance. In the autumn of 2008, two separate but interrelated sub-stories of the recent Icelandic financial and economic saga converged in a tragic grand finale. These are: 1. 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. 2. The rise and fall of three cross-border banks operating on the basis of EU legislation (the European “passport”).