And now, in Iceland, financial supervision and other central bank activities have joined forces again, after a separation of 22 years. Now we have a single institution that is responsible for financial stability and has information on the financial system and developments in systemic risk within that system. The reunified Central Bank has far more explicit authorisations to intervene when events warrant it. It now has to power to affect the behaviour of financial institutions and market agents for the better. Unfortunately, the Icelandic language, rich though it is, still lacks a good enough translation of the English word “prudence”, which encompasses all that we hope to elicit in supervised financial market entities’ behaviour. We need a word that captures the concepts of foresight and thrift. I would like to reiterate what my predecessors said in the aforementioned letter to the Minister of Commerce: Supervision is a normal and appropriate part of the Central Bank’s activities. This supervisory role benefits just as much from its partnership with the Central Bank as various other Bank activities do from partnering with banking supervision. We have seen this in action. The year or so since the merger took effect has been a busy one, but it has proven the value of joining forces – in case anyone was in doubt before. For example, the integration of data and intelligence has been demonstrably beneficial during the pandemic, allowing increased oversight, improved analysis, and harmonised responses.
The senior management of the Central Bank protested vehemently against the separation, and I would like to quote from a letter on the topic, sent by the Board of Governors to the then Minister of Commerce in early 1998: “The Board of Governors is of the opinion that there are overwhelming arguments in favour of the Central Bank’s continued supervision of the activities of deposit institutions, other credit institutions, and securities market entities. The Board of Governors wishes to emphasise in particular that such supervision is a normal and appropriate part of the Central Bank’s activities. This supervisory role benefits just as much from its partnership with the Central Bank as various other Bank activities do from partnering with banking supervision.” If there is any single factor that foreign experts have identified as the main cause of the 2008 financial crisis, it is the fact that responsibility for and supervision of the financial system were spread across a large number of ministries and institutions, with the result that no single party had an all-encompassing overview, no single party was actually accountable, no single party had adequate power, and no single party had enough muscle to intervene. Actually, in other countries where financial supervision had previously been hived off from the central bank, the two functions were reunited after the 2008 crisis. The Ministry of Commerce was united with the Ministry of Finance for the same reason: to enhance the punching power of financial and economic administration.