We are therefore faced with a situation where the traditional triangle of the trilemma is shrinking and sometimes seems to collapsing into the straight line of a dilemma. I still think it is a trilemma, but the trade-offs facing SOFIEs can be severe. In principle, there are three ways to mitigate the problem. The first is to adjust macroeconomic policy frameworks and improve execution and policy co-ordination. The second is to use prudential regulation and supervision aimed at reducing potential vulnerabilities and increasing resilience in the face of volatile capital flows. The third is to introduce targeted tools aimed directly at the financial integration part in order to regain greater monetary independence and shift the effects of monetary policy more to the interest rate channel and towards the non-traded goods sector. In Iceland, this issue is very much on the agenda as the country prepares to lift the comprehensive controls on capital outflows that were introduced at the peak of its financial crisis. We have been working through all of the avenues that I have just mentioned. Very recently, we introduced a CFM tool in the form of a special reserve requirement on portfolio inflows excluding equity. It is constructed in such a way that the bite is biggest for short-term flows.
Although it has already been activated due to the special situation we find ourselves in regarding the process of lifting capital controls, for the longer term we see it very much as a third line of defence after macroeconomic policies, and micro and more usual macropru. It is no panacea and comes with distortions. All of this remains a work in progress, and history will tell whether it will be sufficient to preserve monetary and financial stability in the rougher seas of freer capital movements that we intend to embark upon. 2/2  BIS central bankers' speeches