They needed temporarily to look beyond their traditional markets for funding, and unquestionably these conditions put their resources and management under strain. It can definitely be said that those involved passed this difficult test. The funding problem that loomed around this time a year ago is a thing of the past, terms in the secondary market have been normalised and market confidence has been restored. This is to be welcomed. What remains, however, is of course that people are now more aware of the  BIS Review 42/2007  1  widespread risks that the future may hold in store. Global market conditions can change suddenly. Credit access, which in recent times has been exceptionally favourable for Icelandic and other banks, may change suddenly if unexpected conditions arise. It is important to be prepared for such a contingency. At the height of this furore, I would venture to say that the Central Bank made a strong contribution with its Financial Stability report, which was deemed to be professional, candid and in line with international best practice. The Bank’s next Financial Stability report will be published towards the end of April. Although these were not enviable times for financial companies, they definitely learned a lesson from this ordeal and are both more cautious and more aware of external influences than before. Rapid and sweeping changes in the financial sector put a great strain on regulatory agencies, which may face an uphill struggle to keep up with the swift pace of developments.
The exchange rate has been relatively stable after the adjustment that took place in the first half of last year, and the króna is currently somewhat stronger than historical measures would warrant, although it should be admitted that determinism is probably not the most suitable approach for assessing currency developments. One reason for uncertainty about the exchange rate is the large current account deficit, as well as the fact that it can easily be driven by factors over which we have no control, given how closely Iceland’s financial sector is now integrated with global financial markets. A central bank with a legislative and regulatory remit to target inflation is of course pleased with such inflation developments, but would prefer them to be built on a more solid foundation. Domestic demand growth has declined, but rather more slowly than the Bank had hoped. The current account deficit is large and will also contract more slowly than the Bank would have desired. Demand remains buoyant in the housing market and there are indications that the rate of credit growth may be on the increase again. For these and other reasons, the Bank will remain on the alert and not ease its monetary stance until even clearer signs emerge that a lasting change has been established. Equity prices have soared in Iceland in recent years.