Már Guðmundsson: To what extent do international and EU reform proposals address the fault lines in cross-border banking? Keynote address by Mr Már Guðmundsson, Governor of the Central Bank of Iceland, at the Eighth High-Level Meeting for the Middle East & North Africa Region “Recent policy developments for strengthening the resilience of the financial sector”, Abu Dhabi, 28 November 2012. *  *  *  Governor, chairmen and participants, Let me begin by thanking the organisers for inviting me to address this impressive gathering and thus enabling me to visit this fascinating place. In my speech I will discuss the risks in cross-border banking that manifested themselves in the crisis and what has been done since to address them. The bottom line is that, at the global level, we had developed significant cross-border banking operations that were only very partly covered by the safety net of lender of last resort (LOLR), deposit insurance and adequate resolution powers, and the associated regulation and supervision. I use the metaphor of a fault line to describe this. But first I want to tell you a little more about the origin of my perspective on these issues. It comes first from my tenure at the Bank for International Settlements (BIS) from 2004–2009, where I was involved in work on these issues, with the BIS International Banking Statistics providing a constant point of reference.
This is why the sovereign has been able to tap international capital markets twice so far since the crisis struck, and why its five-year CDS spread is currently below 180 points. Why did the Government give a verbal blanket guarantee for domestic deposits only and not for deposits in the banks’ foreign branches? After all, this distinction probably added fuel to the fire of the so-called Icesave dispute about the settlement of deposit guarantees in Landsbanki’s Dutch and British branches. The short answer is that such a guarantee would never have been credible. As a result, it would not have stopped the run on these deposits and, if attempted, might have bankrupted the Government. At the time, the Central Bank of Iceland’s FX reserves amounted to 2½ billion euros, while the foreign currency deposits in Landsbanki’s Dutch and British branches totalled 11½ billion euros and payment of the EU minimum deposit insurance would have required 4½ billion euros. The sovereign was completely closed off from foreign capital markets at that point. Furthermore, in economic terms, given that these deposits were used to a significant degree to finance illiquid assets in these same countries, such a payment, if possible, would have amounted to a net transfer of resources from Iceland to these countries at a time when Iceland was going through its deepest financial and economic crisis in the post-war period! That made no sense.