Ásgeir Jónsson: Address – 59th Annual Meeting of the Central Bank of Iceland Address by Mr Ásgeir Jónsson, Governor of the Central Bank of Iceland, at the 59th Annual Meeting of the Central Bank of Iceland, Reykjavík, 25 March 2020. * * * On 19 October 1918, Iceland finally reached a sovereignty agreement with the Danish authorities. But that day, 19 October, was momentous for another reason as well. It was the day the second wave of the Spanish flu arrived in Iceland with the passenger ship Botnia. No hygienic measures or mitigating actions were taken at first. In fact, the Surgeon General considered it pointless. The disease spread like wildfire and peaked a mere three weeks after it had been borne to Iceland. However, the authorities prevented the spread of the Spanish flu to North and East Iceland by closing off transportation. At that time, half of the nation lived in the countryside, and it was therefore easier to maintain distances between people than it is today. Iceland recorded its first death from the Spanish flu on 2 November 1918. An estimated 63% of Reykjavík residents were infected, and around 500 Icelanders died, making for a mortality rate of 2.6%. The Spanish flu hit young people the hardest. It is clear that, against this backdrop, the celebration of Iceland’s sovereignty, when the Danish-Icelandic Act of Union entered into effect on 1 December 1918, was a bittersweet affair. But misfortune had more in store for Iceland.
As the level of competition in the corporate bond market is much lower, a key priority in the design of these operations was to encourage strong participation from market makers. Accordingly we decided to adopt a uniform pricing method for these auctions, in which the Bank pays the same (highest) price for all the accepted offers to sell us a given bond. Our judgement, was that this approach would help incentivise participation and therefore competition, as participants do not need to make firm judgements about the overall market level, but can instead focus on their own valuations. This effect may be particularly important for increasing the likelihood of smaller or less informed market participants taking part. This increased participation should in turn increase the likelihood of the Bank achieving competitive pricing in its purchases. By contrast our gilt auctions allocate on a receive-your-offer (‘discriminatory pricing’) basis. This works well when broad participation is assured. Third, the relative value of offers is judged in a different manner in our corporate bond operations. For gilts, we allocate relative to representative market yields at the end of our auctions – this enables participants to accurately anticipate the competitiveness of their offers. If a similar approach had been applied to our corporate bond operations, where there is considerably less certainty around the prevailing executable market price , the Bank would have risked allocating against stale market prices, or prices that could easily be influenced by participants in the auction.