Iceland Chamber of Commerce working paper May 2006, “FINANCIAL STABILITY IN ICELAND” by FREDERIC S. MISHKIN & TRYGGVI T. HERBERTSSON —
There are concerns that the banks could experience refinancing problems. Although the banks’ reliance on external financing poses the biggest risk to the financial system right now, the probability of a credit event occurring is low. The rapid credit growth in the banking system and the banks’ transformation from concentrating on domestic lending, to becoming international financial intermediaries, also presents some risk because the banks may not have been able to develop organizational capital fast enough to run their new business safely. These concerns have led to criticism of Iceland’s banks for lack of transparency. However, the Financial Supervisory Authority’s awareness of these risks and the fact that Iceland has high quality governmental institutions make it unlikely that there are serious problems with safety and soundness in the banking system.
OK, it’s easy to go back 2 years and do this.Â But Mishkin is a big name who went to a 2 year stint on the US Federal Reserve Board of Governors right after this paper came out.Â Â Thus if nothing else it’s symbolic of the optimistic conventional wisdom at the very top that financial globalisation could be handled.Â It’s unlikely many Icelanders feel now that they had “high quality government institutions”.