The BoA has progressed in reforming the banking system towards international standards, with the aim of the developing and refining the country’s banking infrastructure. AIPS, inaugurated in early March 2004, can be considered as the backbone of the whole banking system infrastructure. The BoA wishes to bring its central bank closer to that of the European Central Bank. Therefore, changes and amendments of the Bank’s regulations are aimed towards achieving this goal. BIS Review 49/2004  1
By no means all this foreign currencydenominated credit has been provided to domestic businesses and households that have foreign currency income or other hedges against exchange risk. This poses a particular risk for borrowers and lenders alike. Foreign debt of deposit money banks at the end of January 2004 had risen year-on-year by almost 300 b.kr., or two-thirds. There are probably a number of explanations for this strong demand for foreign borrowing. Firstly, it is connected with changes in Icelandic business structures and ownership. Following the privatisation of state banks, investors have been actively involved in dissolving the old links in business ownership and forging new ones. Foreign funding, mediated by the banks, has played a key role in these events. Secondly, conditions in international finance markets have been  BIS Review 18/2004  3  favourable for such reshuffling. Foreign short-term interest rates are close to a historical low and foreign long-term interest rates are still very low, although they have risen above the nadir they reached around the middle of last year. Thirdly, Iceland enjoys economic stability and growth prospects are favourable for the next few years. In December last year the Central Bank sent a letter to chief executives of the commercial banks and largest savings bank expressing concern about the rapid increase in lending and high levels of foreign short-term financing. As is generally the case people responded in different ways, and some pointed the finger elsewhere.