Even though domestic financial institutions might seem to profit, for the short term, by a depreciation in the króna and a rise in inflation, a trend in this direction would quickly take its toll on indebted households and businesses and would eventually result in loan losses. From the standpoint of financial stability, it is critical that inflation be reined in. It is also appropriate to emphasise the obvious fact that Icelandic banks’ access to foreign credit will not change if the Central Bank lowers the policy rate. It has been maintained that, because central banks in other countries have lowered their interest rates, the wider interest rate differential with abroad that resulted should have given the Central Bank of Iceland the margin to reduce its policy rate this February. This is not entirely correct. As is well known, the US Federal Reserve Bank reduced its interest rates in several stages, for a total reduction of 2.25%, over the course of the fall and winter. The Bank of England has lowered its base lending rate twice this winter, for a total reduction of 0.5%. Other central banks in our neighbouring countries have not lowered their rates. The European Central Bank has kept its interest rates unchanged for several months, and the central banks in Norway and Sweden raised their rates earlier this year. The Reserve Bank of Australia also raised its rates recently. Australia belongs to the group generally referred to as high-yield countries.
Nonetheless, all three of Iceland’s large commercial banks recorded a profit in the fourth quarter of 2007, and they concluded the year with an ample equity position. Banks all over the world have been forced to write off large amounts of money because of their investments in securitised assets related to the US mortgage market. Icelandic banks’ investments in obligations of this sort were small. That being the case, they have had relatively little need for such write-offs – and some had no need whatsoever because they had not invested in securitised assets. Furthermore, it is worth remembering that changes in the share price of Iceland’s banks have not differed markedly from that of banks in other areas of the world. Over the past few years, for example, the share price of Icelandic commercial banks dropped by 7-30%, while various large Nordic banks fell 15-40% and the shares of well-known international banking giants depreciated by margins ranging from 30% to over 50%. The decline is greater if measured against the peak of share prices. Financial companies carry unusual weight in the Icelandic stock exchange’s share price index (OMXI 15) – at present, some two-thirds. No matter where one looks, the price of financial company stock has declined all over the world – in most locations, it has fallen more than that of other companies that constitute equity indices.