Further, under this Act the CNB has at its disposal practically all the tools known to advanced market economies. BIS Review 25/1997  -6-  At the beginning of the transformation process, the main tools of monetary policy were, quite naturally, direct ones. Credit limits, interest rate ceilings expressed as maximum deviations from the discount rate and refinancing loans (in 1991 represented for small, new banks on the average 60 per cent of total sources but for big banks 5-10 per cent only) were used. Credit and interest rate ceilings were abolished in 1992 which can be regarded as a transition year towards indirect control of monetary developments. After credit ceilings on the minor banks were removed in April 1992 and on the major banks in October, central bank control of monetary developments was effected through discount rates, minimum reserve requirements, auction refinancing credits and central bank bills. My predecessors behind this chair, the governors of the central banks from Germany and Switzerland, underlined the role of money supply targets in the kit of tools. In this respect the Czechoslovak and the Czech practice can enrich the experience. Since 1990 the intermediate targets have been set in the form of planned changes in credits or money. For 1990 the target was “to keep the development of credits in total within the scope of -2 per cent to +1 per cent related to the level at the end of 1989”.
The EEA Agreement is basically a mechanism through which EFTA countries like Iceland and Norway were allowed to participate in the EU single market, which includes free movement of capital and provision of financial services. The underlying principles are those of home licensing for operation anywhere in the area and of a level playing field for competition, where size and location are not supposed to matter. It therefore goes against the underlying principles of this framework to consider the size of banks relative to GDP as a metric for concern, as is now so rightly in fashion. This so-called European “Passport” enabled the Icelandic banks to operate throughout the EEA, including through branches in other EEA countries. We now know that there are deep flaws in this framework and that these flaws are important elements in the current euro area crisis. A key issue here is the contradiction between the European Passport rights, on the one hand, and national supervision, national deposit insurance, and national crisis management and resolution regimes, on the other. This is what recent proposals of a banking union are supposed to address. All of these problems are much aggravated when different currencies come into play, and for EEA countries and EU countries outside the euro area, this framework also has embedded in it a potentially huge foreign currency liquidity risk in the banking system that is not covered by a LOLR.