Thus, price stability is the main objective of monetary policy in all of these countries and has in fact become the recognized single target for monetary policy in numerous countries. The reason for this emphasis on price stability is that it creates the best conditions for balanced growth and increased welfare. The Icelandic financial market has developed very rapidly over the last ten to fifteen years. It is a small market by definition, but has nevertheless the same institutional set-up as larger industrial countries. Aside from the Central Bank, these include commercial banks, savings banks, securities companies, various investment funds, insurance companies, large and important pension funds and last but not least a stock exchange - linked with the other Nordic exchanges - where the shares of 60 to 70 Icelandic companies are listed and traded on regular basis. Supervision of the activities of all of these institutions is in the hands of a unified financial supervisory authority that has broadly the same legal powers and follows the same methods and standards as supervisory agencies in other European countries. Important rationalisation has taken place in the Icelandic financial system. Until a few years ago, two of the main commercial banks were fully government owned and so were a host of so-called investment credit funds. The funds were unified in a single institution, which was subsequently privatised.
In order to achieve this, financial statements must – in the case of instruments for which it is economically relevant – be sensitive to price signals from markets, which reflect transaction values. I believe that two elements are important in this argument. The first is that financial statements have the crucial merit of providing information. The second is that the rationale of fair value valuation contains within it its own limitations. The concept of "transaction", which is  BIS Review 160/2008  1  fundamental in this context and, as a result, that of "market", should constitute the limits of the scope of application of fair value accounting. Are accounting choices neutral? It goes without saying that the greater sensitivity of balance sheets to market fluctuations resulting from fair value accounting obviously has an impact on financial stability. A central banker may legitimately wonder whether accounting conventions are neutral with respect to the behaviour of financial players and market dynamics. The current crisis and volatility that we have been faced with over the past few months suggest that accounting conventions have an impact in terms of financial incentives and may have had a not insignificant impact on financial players' strategies. One example serves to illustrate this point. It is macroeconomic in nature and relates to risktaking by financial institutions. It is the possibility, in the case of some instruments, of recording as of the first trading day all of the discounted future profits even though the risks remain on the balance sheet.