Although the adjustment would ultimately be greater if it occurred slowly, a very rapid contraction would deliver such a jolt to the finances of many households and businesses that loan losses would result. It is likely that a range of risks will have to be faced, but efforts must be made to minimise the probability of a financial crisis that could harm potential output and living standards. In the final  2  BIS Review 41/2007  analysis, the critical factor is how strong and well equipped the financial system is to withstand shocks, i.e. its resilience. The crucial factor behind the Central Bank’s assessment that the financial system is now more resilient to shocks is the banks’ stronger liquidity and equity positions than a year ago. The major commercial banks have a diversified income base that extends to many countries. Another advantage is the somewhat different business models they have used in their expansion. Their diversified assets give less reason to fear the consequences of an unexpected strain on the financial system. Iceland’s strong fiscal position underpins the banks’ international credit ratings. Other important factors have been the strengthening of Iceland’s foreign reserves and the Central Bank’s capital. Both measures represent natural responses to changes caused in the Central Bank’s operating environment by the very rapid expansion of the commercial banks, especially abroad. Although the main function of a financial stability report is to highlight risks, factors conducive to strengthening the long-term economic outlook should also be duly noted.
We are able to control the interest rates in the money market via various policy instruments through an efficient liquidity management and affect the money market rates in the favored direction and to the required extent. Accordingly, I would like to underline that in addition to the average funding cost, Interbank Repo Market rates shown in the chart should be closely monitored for a better assessment of the monetary policy stance. We will gradually raise this predictability of the monetary policy in the period ahead and ensure that interest rates in the Interbank Money Market to hover around 6.75 percent except the days on which the EPS is implemented. To enhance predictability in the funding strategy, we will limit the stock amount of the weekly funding we provide through the quantity auction method at 4.5 percent, not to exceed TL 10 billion until the year-end. Moreover, issues regarding the implementation procedures besides the funding amount to be made under this method as of 2014 will be elaborated on in the Monetary and Exchange Rate Policy for 2014 to be published in December 2014. Under this outlook with a gradual increase in predictability, I would like to remind you that our monetary policy will remain cautious until the inflation outlook becomes consistent with the medium-term projections. In the third quarter, interest rates were down from the previous reporting period across all maturities, with a larger decrease in the shorter end, while the yield curve trended upwards (Chart 5).