OECD Journal: Financial Market Trends

Frequency :
Semiannual
ISSN :
1995-2872 (online)
ISSN :
1995-2864 (print)
DOI :
10.1787/19952872
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The twice-yearly journal from OECD providing timely analyses and statistics on financial matters of topical interest and longer-term developments in specific financial sectors. Each issue provides a brief update of trends and prospects in the international and major domestic financial markets along with articles covering such topics as structural and regulatory developments in OECD financial systems, trends in foreign direct investment, trends in privatization, and financial sector statistics covering areas such as bank profitability, insurance, and institutional investors.

Periodically, a small number of articles within one field of financial sector developments – constituting the so-called special focus for the particular issue – may be included.

Now published as part of the OECD Journal package.

Article
 

The Fault Lines in Cross-Border Banking

Lessons from the Icelandic Case You do not have access to this content

Authors:
Már Guðmundsson
Publication Date
23 Mar 2012
Pages
24
Bibliographic information
No.:
24,
Volume:
2011,
Issue:
2
Pages
85–95
DOI
10.1787/fmt-2011-5k9cswn0lljj

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This paper discusses the fault lines in cross-border banking, both at the global level and at the European Union/European Economic Area (EU/EEA) level, using the case of the three Icelandic cross-border banks as an example. Cross-currency liquidity risk built up prior to the crisis, especially maturity mismatches in foreign currency. This risk tended to be grossly underestimated at the time. There was a run on banks’ FX liabilities after the collapse of Lehman Brothers in September 2008. The Icelandic banks were highly vulnerable to such a run and lacked a credible lender of last resort (LOLR) in terms of foreign currency. The crisis also exposed serious flaws in the EU and EEA framework for cross-border banking, including deposit insurance. One of the main lessons of the Icelandic experience is that sizeable cross-border banking operations in small countries with their own currency come with very significant risks. The Icelandic experience suggests that further reforms are needed for cross-border banking activities in the Single Market, where the key issue is to match the European passport for banks with pan- European supervision, deposit insurance and LOLR. Domestic banks could remain in the domestic system.