To conclude on the economy, in its monetary policy statement issued on the occasion of the latest policy rate decision on April 10, the Board of Governors once again stated that the Bank’s most critical task was to reach the inflation target as soon as possible. The demand shocks of the past few years and unusual conditions in the global financial markets had delayed that process. There was no reason to surrender any ground in the battle against inflation. Thus the Central Bank continues to be fully committed to the inflation target. Financial sector You are familiar with the expansion of Icelandic banks to other countries, including Norway. This development followed the banks’ full privatization a few years ago. The three major banks all expanded their activities to other countries but followed different strategies. The record shows that their investment in financial services companies abroad was generally very sound. They have good and solid operations in other countries. Because of this development, the banks have become less Icelandic and more Northern-European, as demonstrated among other things by the fact that in 2007 the three biggest commercial banks derived more than half of their overall income from activities outside Iceland and the biggest bank derived about two thirds of its income from operations outside Iceland. They are therefore much less sensitive to cyclical developments in Iceland than before, or in any one country for that matter. The risks are much better spread than before. 2  4  Central Bank of Iceland: Monetary Bulletin 2008/1.
It could thus acquire very significant external debt before reaching debt levels of many other developed countries with strong credit ratings. These CDS spreads have also come down significantly from their peak. Despite the very high CDS spreads on the Icelandic banks, they have funds at levels that are below their CDS spreads. Nevertheless, the access of the banks to external financing has been limited. Their liquidity cushion means that they can stay out of the market for quite some time. The prevailing circumstances in international capital markets and the limited prospects of improvement in the foreseeable future have, however, led the banks to embark upon a process of reducing costs and streamlining their operations, including liquidating assets, and on attracting deposits. This is a process that evidently will have to continue. It does not detract from the fact that the banks had solid capital and liquidity positions at the end of last year as reflected in their 2007 accounts. They had a solid performance in 2007. They all returned a profit in the last quarter of the year despite the significantly more hostile operating environment. It was also notable that the profitability of their core operations was strong in that quarter. Taken together, the banks had insignificant exposure in sub-prime related instruments and where they existed, they have been significantly reduced. Thus, there have been small write-downs of sub-prime related debt as there has been little to write down.