There are legal arguments about the merit of such claims that I will not comment on here. The fact of the matter is, however, that the Icelandic Government made three good faith attempts to close the issue through negotiated settlements but got caught up in political dynamics and the case might be on its way to the EFTA Court. But the financial risks for the parties involved are dwindling, as it now appears that the estimated recovery from the estate of Landsbanki will cover almost 100% of all deposits in the foreign branches. And of course, the priority given to deposits in the Emergency Act is of vital importance to that result. Let us now turn to some of the lessons learnt from the crisis. First, as regards the EU/EEA framework, the bottom line is that we cannot have a level playing field in banking, except perhaps in risk-adjusted terms, as long as the EU passport is not matched by EU supervision and an EU-wide safety net, which is the logical solution. Furthermore, EU-active banks from small countries with their own currencies should have reduced passport rights and/or face higher capital charges, as they have a less credible LOLR and are therefore more risky, other things being equal. Subjecting all banks in the EU to supervision by an EU supervisor is probably too much, and in practical terms, it might make sense to have two types of bank licences.
This saved the Government significant expense in recapitalising the banks. The new banking system amounted to 1.7 times GDP. As a result, the domestic payment system functioned more or less seamlessly throughout, and customers had continuous access to their deposits. The run on the domestic banks stopped, but at its peak, demand for cash tripled and the Central Bank almost ran out of banknotes. Nonetheless, international payment flows were seriously affected by the freezing order imposed by the UK, and the British authorities’ suspicion that Iceland would not honour deposit insurance in UK branches of the failed Landsbanki and by general distrust among foreign counterparties. With heavy Central Bank involvement, international payment flows were gradually restored in the months that followed. I have expanded at some length on the measures taken when the banks failed, as there are still a number of misconceptions about the process. Some have claimed that the banks were  BIS central bankers’ speeches  3  nationalised. They were not. The old banks are private companies. They are in winding-up proceedings governed by law; they are not under the control of the Government. The Government has a majority stake in only one of the new banks. Others have claimed that Iceland defaulted and got away with it. The opposite is true. The credit of the sovereign was preserved, and all debt obligations have been paid on time. This is why the sovereign was able to tap international capital markets last summer, and why its CDS spread is currently around 300 points.