Address of the Minister of Economic Affairs to the Annual Meeting of the Central Bank of Iceland 2012
Ladies and gentlemen, honoured guests,
It gives me great pleasure to address the Annual Meeting of the Central Bank of Iceland – if perhaps in a somewhat unusual manner on this occasion. I wish to use the opportunity to extend a special welcome to Katrín Ólafsdóttir, assistant professor at the Reykjavík University School of Business, who has now taken up a position as a new member of the Bank's Monetary Policy Committee, and to thank the retiring member, Anne Sibert, for her good work and important contribution to the reconstruction activities that are now taking place within the Bank.
It is a matter of great satisfaction that the economic recovery should have got under way in the last year after a long and deep recession. Following economic growth of 3.1% last year, the outlook is for continuing growth in the present year. Not least in this connection, investment in industry has started to pick up, this being the precondition for dynamic and sustainable economic growth as we move into the future. A transformation in companies' balance sheets following debt restructuring and the Supreme Court's rulings on exchange rate-linked loans is making it easier for companies in this country to take advantage of improved competitiveness in the economic system to move forward. The growth in private consumption is also a matter for celebration, being built on increased incomes, falling unemployment and reduced uncertainty about future prospects. It is important for both individuals and companies to take advantage of the improved economic conditions to reduce their debt – since high debt levels are risky both for those who bear the debts and for the economic system as a whole. Economic growth has also led to improvements on the employment front, with falling unemployment and significant job creation. Rising employment and falling inequality within society, as recent figures from Statistics Iceland figures demonstrate, are laying the foundations for a strong society and a robust economic system.
Further cause for encouragement comes from the strong position in Iceland's leading export sectors. The capelin season promises to yield a substantial income bonus, while the tourist industry goes from strength to strength, with a yearly increase in visitors to Iceland of 10‑20%. Increased numbers of tourists – and in particular the ever-expanding tourist season – is yielding important dividends in foreign currency reserves and economic development in many parts of the country.
Economy recovery has, however, been made more difficult than it might have been by turmoil on the international markets – not least in Europe. Despite the protection afforded to the Icelandic financial system by the capital controls, turbulence on the world's financial markets is having a considerable effect on both foreign investment and access to foreign capital by domestic interests, including the Treasury. Now, however, the signs are broadly more positive than they were at the end of last year and the Icelandic economy is now well placed to take advantage of better times.
Despite the considerable successes of the last years in rebuilding the economic system, there is still much to be done – not least in creating an overall framework for the financial market and in building up confidence in monetary policy.
It is greatly in all our interests to ensure that the financial system can never again threaten the economic system and even the very fabric of society. It is important to further strengthen the regulatory framework of the financial markets and to see that regulatory institutions have sufficient funds and expertise to carry out their tasks. Beyond this, it is important to ensure that the banks are sufficiently capitalised to be able to withstand adverse conditions, and, if things go badly, that the cost of financial difficulties falls on the owners of the banks rather than on the general public. In this connection we need to have firmly in place an integrated regulatory and supervisory framework covering the entire financial system – so that the regulation of each and every part of the financial system links in effectively with the regulation of the system as a whole. Important in this connection is improved co-operation between the Central Bank and the Financial Supervisory Authority, not least in the form of a cooperation agreement between the two institutions. What we must never allow to happen again is for the financial system to grow beyond our control and for the regulatory bodies over financial markets to fail in their appointed roles. The political reforms that come into force on 1 September this year will also create a powerful ministry of finance and economic affairs that will be able to play an active part in the consultation and co-ordination needed to implement economic policy.
To stimulate discussion of these matters and to help move things forward, a report was presented to government last week on The Future Structure of the Financial System. The report does not present fully worked-out proposals, but rather discusses the main issues and attitudes in this area objectively and with reference to international developments. The aim is to create a rigorous framework and a level playing field that will support the operation of a secure and effective financial system in this country of an appropriate size for our society.
Following on from this, a group of specialists is being set up to work on proposals based on the report. This group comprises Gavin Bingham, former Secretary General of the Central Bank Governance Forum at BIS in Basel; Jón Sigurðsson, former President and CEO of the Nordic Investment Bank (NIB) in Helsinki; and Kaarlo Jännäri, former Director General of the Finnish Financial Supervision Authority. The report addresses various matters of current debate, including the separation of investment activities from general commercial and retail banking activities. Similar questions over the division of banking activities are being aired in our neighbouring countries. Over the years, in the wake of a recession, people have generally decided to tighten the rules on the finances of financial companies. In the case of Iceland it is clear that certain rules for the splitting up of banking activities will be examined following on from the detailed discussion of these issues in the recently published report.
In addressing these issues it is important to look both at our own experience of recent years and at the fierce debate they are provoking in the international arena. Similar discussions are currently being conducted in neighbouring countries, though as yet in general without any definitive decision as to how they will be dealt with in the long-term future. There is, however, increased pressure to reach a decision in this area due to the introduction next year of new banking legislation for the internal European market based on the Basel III regulatory framework.
An important part of the changes brought in by this new legislation is increased and improved equity, and it must be clear to everyone that the requirements that were in force prior to the collapse were inadequate. The requirements currently applying to Icelandic banks are based on the requirements of the Financial Supervisory Authority that were instituted when they were set up and are considerably more stringent than mandatory minimum requirements. These tighter FME requirements are intended, all else being equal, to remain in force until August this year. It might, however, be inopportune to reduce the capital requirements on banks now, with new and tougher regulation on the horizon. Apart from this, there is the danger that the capital requirements that will come in under the new regulatory system will be lower than what might be seen as optimum as regards the general interests of the economic system and of society as a whole. It might thus be wise to bring in higher equity requirements as early as this autumn, before the new European banking legislation comes into force. These requirements could then take account of the requirements proposed in the new European regulatory framework as well as the current minimum FME requirements and developments in neighbouring countries.
Discussion of the future shape of monetary and foreign exchange affairs needs to be conducted coolly and dispassionately. Viewed overall, the króna has served us Icelanders well since the collapse. It has allowed a speedier readjustment of the economic system and its fall in value has benefited export industries, which has in turn supported the recovery. Had Iceland been a member of the eurozone under present conditions, it is very probable that people's gloomiest predictions concerning unemployment rates in the final months of 2008 would have been realised and we would now be experiencing over 20% unemployment.
This does not alter the fact that in currency matters we Icelanders now face major tasks and a number of important questions. The biggest issue facing us now in this area concerns the capital controls. The Central Bank has put forward a liberalisation strategy that forms the basis of current policy; the strategy has recently borne visible fruit in the results of a foreign currency auction on 15 February. The auction was oversubscribed and yielded over 30 billion krónur in foreign exchange and treasury bonds.
A cross-party committee appointed by the Minister of Economic Affairs is currently investigating, among other things, further ways of lifting the capital controls. It is my hope that this committee will produce proposals which may support the Central Bank and the government in bringing forward the removal of controls. Once we have managed to correct the position of the Treasury, finalise the IMF programme, bring the Treasury back onto foreign markets, and institute a new financial system, it is clear that the next huge task in the area of economic affairs is the matter of how the capital controls will be lifted. In addition to the plan currently in force and the work of the committee, I believe it important that we obtain a more detailed analysis of how the balance of payments is likely to develop over the next years. Such an analysis will serve us as a solid basis for the further relaxing of capital controls.
A great deal might be said about the Iceland's future in foreign currency matters, and opinions are divided. There has been talk of the Canadian dollar, the Norwegian krone, the US dollar, the adoption of the euro or linkage to the euro, of unilateral adoption of a currency or currency co-operation. A consultative committee comprising members of all the political parties as well as representatives of the Confederation of Icelandic Employers and the Icelandic Confederation of Labour has recently started work on the formulation of currency and monetary policy. The aim of the committee is to ensure wide-ranging consultation and fully thought-out preparation in the shaping of monetary policy. The committee has as its remit to look into the principal benefits and drawbacks of various approaches in the long-term arrangement of currency and monetary affairs in Iceland. It will report to the minister in spring, and a decision will then be taken on whether it will continue in operation. Caution will need to be applied in both the removal of the capital controls and the future of currency affairs; much depends on these matters and it makes sense for all involved to show great scepticism of any kind of instant solution. Major interests are at stake and all unnecessary risks must be avoided.
Finally, it is excellent to be able to say that, in spite of the many and various difficulties, the Icelandic economy has come a long way in putting the problems of the economic system behind it. The prophecies of the defeatists, whose numbers increased rapidly after the collapse, are shown at regular intervals to have been mistaken. In addition to the welcome indicators that I noted at the start of my address, it was a great step on our way to recovery when 20% of the loans from our collaborating countries were paid in advance. With this, the debt position on the national account was reduced by more than 6%, a matter that has attracted widespread attention – and not without reason. There is considerable interest in Iceland's position, and especially in the results we have achieved in our arduous struggle. This, for instance, is the reason I am addressing you here from the screen rather than standing before you in person; the present moment finds me in Canada for meetings with the Canadian authorities, among other reasons to present them with an account of the progress we have made so far.