The Financial Supervisory Authority was granted broad-based powers to intervene in failing institutions, and the Government was authorised to inject capital into new domestic banks. This so-called Emergency Act thus allowed new domestic banks to be created when the old cross-border banks failed and were placed in special resolution regimes followed by winding-up proceedings. The new banking system amounted to around 1.7 times GDP, compared to 10 for the old banking system. As a result of these measures, the domestic payment system functioned more or less seamlessly throughout, and customers had continuous access to their deposits. 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 in international discussions. There have been claims that Iceland allowed its banking system to collapse, with what now seem reasonable results, and that others should consider doing the same. The fact is that Iceland kept the domestic part of the banking system running throughout; otherwise, the consequences would have been dire. Some have claimed that the banks were 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.
BIS central bankers’ speeches  Monetary policy The task of evolving our liquidity insurance framework will not end, but given the substantial reforms made to it over recent years, it is likely that the focus will shift to monetary policy implementation, as and when the MPC decides to move policy away from its current settings. As the head of the Markets Directorate it is not my role to speculate when the policy setting might change, but it is my job to ensure that decisions of the MPC are implemented effectively. That involves, in particular, ensuring that we have the tools needed for effective monetary control; that is, keeping overnight market interest rates in line with Bank Rate. The Bank’s current approach is to pay Bank Rate on the full balances held in reserves accounts. This is known as the “floor” system. As set out in the SMF Annual Report, this approach remained successful at keeping sterling overnight market rates close to Bank Rate during 2014–15, with the “wedge” between policy rates and market rates relatively small over the past year. But over the year, activity in the sterling money markets remained low as the floor system, alongside a large-scale injection of reserves through QE, reduced the need for banks to transact in money markets. In the near-term, I expect that this system will remain effective at moving market rates in line with any change made to policy rates by the MPC.