Iceland: Financial System Stability Assessment—an Update completed August 2008

I invite you to read: “The update to the Financial System Stability Assessment on Iceland was prepared by a staff team of the International Monetary Fund and as background documentation for the periodic consultation with the member country. 

It is based on the information available at the time it was completed on August 19, 2008 and provided background information to the staff report on the 2008 Article IV consultation discussions with Iceland, which was discussed by the Executive Board on September 10, 2008, prior to the recent Board discussion on a Stand-By Arrangement for Iceland.” 

It makes fascinating reading, especially in these times when the regulators now want to tackle systemic risks while ignoring that their regulations are in fact the prime source of systemic risk. In it, dated just a month before the crisis exploded at the end of September 2008, we can, among other, read the following: 

“The banking system’s reported financial indicators are above minimum regulatory requirements and stress tests suggest that the system is resilient. Bank capital averaged almost 13 percent of risk-weighted assets between 2003 and 2006, dropped to 12 percent in 2007 and to approximately 11 percent in the first half of 2008, but remain above the 8 percent minimum. Liquidity ratios are likewise above minimum levels. Notwithstanding the positive indicators, vulnerabilities are high and increasing, reflecting the deteriorating financial environment” 

To me once again, this just proves that no one had the faintest idea of what the “risk-weighted assets” really meant and, if they did, they had no will to question the significance of risk-weighting.

PS. Risk weights are to access to credit what protectionist tariffs are to trade, only more pernicious.