Currency swap lines crucial, Icelandic central banker says

July 9, 2011 - 14:44
Currency swap lines made a key difference in the heat of the financial crisis and deciding which countries get them should be at the heart of debates on economic governance, the head of the Icelandic central bank, the Sedlabanki, said Saturday.

While maturity mismatches within the same currency are “the bread and butter of banking,” maturity mismatches in different currencies are “a major fault line” and need to be taken into account my governments, regulators and markets, Mar Gudmundsson, Sedlabanki governor, said in a panel discussion at the Rencontres Economiques d’Aix en Provence conference. This is partly because as long as mismatches are in the same currency, that country’s central bank is the lender of last resort, but in the crisis it was unclear who was responsible for cross-border commitments.

In the crisis “it was dollar swap lines that made the difference; it was the ‘domestic lender of last resort’ concept applied at a national level,” Gudmundsson said. “There are important unresolved governance issues, such as which countries get a swap line and which ones do not.”

Iceland, which suffered a banking collapse in 2008 that the prime minister at the time said threatened to bankrupt the country, is now in talks to join the European Union. It’s the only country that has ever left the bloc previously. Gudmundsson stressed the importance of having proper regulatory structures if the country rejoins the bloc.

“The bottom line is that we cannot have a level playing field in the European Union as long as the European banking passport is not matched by a regulatory system and safety net,” he said, referring to plans for smoother operation of cross-border banks.

“Those banks that want the European passport would be supervised by an EU authority, have their deposits backed by a European system, and the lender of last resort would be, in most cases, the European Central Bank,” he added.

(Source: Dow Jones)