Address by the Chairman of the Supervisory Board at the Bank´s Annual Meeting

Address by Ólafur G. Einarsson, Chairman
of the Supervisory Board, Central Bank of Iceland,
at the Bank’s Annual Meeting,
March 31, 2006
Prime Minister, Honourable Ministers of the Government, Speaker of the Althingi, Ladies and Gentlemen:


On behalf of the Supervisory Board of the Central Bank of Iceland I welcome you all to the Bank’s 45th annual meeting and declare this meeting open. At the end of my address the Chairman of the Board of Governors, Davíð Oddsson, will present a survey of economic and monetary developments, the Bank’s monetary policy and its implementation, and discuss aspects of the position of financial companies. After his report the Prime Minister of Iceland, Halldór Ásgrímsson, will address the meeting. When the meeting has completed its duties, I invite those attending it to a reception. Guests will notice that the joint numismatic collection of the Central Bank and the National Museum, which was previously housed at Einholt 4, has now been relocated here to the Central Bank’s head office on Kalkofnsvegur. The exhibition is more or less permanently in place and will be officially opened shortly. Guests will have the opportunity to see the exhibition in its present form.

At a meeting of the Supervisory Board today the Prime Minister ratified the Bank’s financial accounts for 2005 with his signature. The Central Bank’s Annual Report for 2005 is published today and will be available at the end of this meeting.

The Central Bank’s annual accounts are compiled on the basis of rules set by the Prime Minister. These state that preparations of the annual accounts shall be in accordance with laws on annual accounts, financial companies and accounting, and with recognised accounting principles. Important changes were made to the rules last year which took effect when the financial statements for 2005 were compiled. First, the Central Bank’s fixed assets are now entered in the balance sheet. Previously, they were expensed on purchase and mentioned in the notes to the accounts. In total, the Central Bank of Iceland’s balance sheet expanded by 4.9 b.kr. as a result. This change is in line with common central bank practice in the industrial countries. The other main change was that calculated exchange rate gain and loss are deducted from profit as in the profit and loss account before the allocation to the Treasury is calculated in accordance with Article 34 of the Central Bank Act.

Maintaining foreign reserves exposes the Central Bank to currency risk from changes in the exchange rate of the króna against which it is unable to hedge – and increasingly so, the larger the reserves. Changes in the exchange rate of the króna have no effect on the value of the reserves denominated in foreign currency. The Central Bank’s foreign assets and liabilities are entered in the accounts at market price, translated into domestic currency at the end of the year. Changes in the exchange rate have a direct impact on its calculated profit. Foreign exchange rate loss and gain are expensed in full in the profit and loss account, directly affecting the Bank’s result.

According to its profit and loss account, the Central Bank of Iceland made a net loss of 2.8 b.kr. in 2005, compared with a loss of 6 b.kr. in the previous year. The expensed foreign exchange loss, which was caused by the impact of the appreciation of the króna on the local currency value of the foreign reserves, amounted to 2.6 b.kr. Interest income on domestic deposits and securities increased year-on-year by 1.7 b.kr. and on foreign deposits and securities by 51 m.kr. Interest expense on domestic deposits increased by 2.5 b.kr. from 2004 and on foreign liabilities by 13 m.kr. Depreciation was posted to the profit and loss account for the first time and amounted to 90 m.kr. Operating expenses including depreciation amounted to just under 1.3 b.kr., which is somewhat lower than in the previous year.

In 2005, the Central Bank’s balance sheet total increased by almost 56 b.kr. to 162 b.kr. at the end of the year. Particularly sharp increases were seen in repurchase agreements (repos) with credit institutions on the asset side and on the Treasury current account on the liability side. Accordingly, the composition of the Central Bank’s balance sheet shifted considerably in 2005. In 2003 and 2004, the Bank’s domestic assets were much smaller than its foreign assets, at 33% and 39% of total assets for the respective years. This was reversed in 2005, when domestic assets accounted for more than 58% of total assets at the end of the year. One main reason for the turnaround was that the Treasury deposited its proceeds from the privatisation of Iceland Telecom, which were paid in the autumn, in its current account in the Central Bank. Liquidity of credit institutions tightened firmly as a result and repos with the Central Bank increased substantially. Outstanding repo stock stood at almost 38 b.kr. at the end of 2004 but just under 88 b.kr. at the end of 2005.

Since the middle of 2004 the Central Bank has significantly narrowed its interest rate corridor, i.e. the spread between its highest and lowest interest rates. In mid-2004 the Central Bank’s interest rate corridor was 5 percentage points, but at the end of 2005 it had narrowed to 3 percentage points. The purpose of this change was to improve the effectiveness of the Central Bank’s monetary policy measures and smooth out interest rate volatility in the interbank market. A narrower spread also means that, other things being equal, the Bank will produce less profit than otherwise.

The Central Bank’s financial accounts for the year are published in their entirety in the annual report together with detailed notes on individual items. Its financial performance and changes in the balance sheet during the year are also described in detail.

In September, Birgir Ísleifur Gunnarsson announced that he had decided to retire as Chairman of the Board of Governors of the Central Bank of Iceland at the end of that month. Birgir Ísleifur Gunnarsson was appointed Governor of the Central Bank of Iceland on February 1, 1991. He was elected Chairman of the Board of Governors in May 1994. He had therefore served as Governor for almost fifteen years, including almost twelve and a half years as Chairman of the Board of Governors. During his chairmanship of the Board of Governors, radical changes took place in the Icelandic financial system. All manner of business was liberalised and deregulated, domestic financial markets evolved rapidly and, last but not least, the monetary framework was completely overhauled and the Central Bank was granted more independence in its actions and decision-making. No one who has observed the Central Bank of Iceland in recent years can have failed to notice how steadfastly and professionally it has been run, and its credibility strengthened. Such results are only achieved by strong leadership. Birgir Ísleifur Gunnarsson earned respect and confidence within the Central Bank and outside it. Professionalism, modesty, steadfastness and dignity were the characteristics that he showed throughout in his dealings with the Supervisory Board, both at its meetings and at other times. On behalf of the Supervisory Board I thank Birgir Ísleifur for our work together and his successful leadership of the Bank.

Davíð Oddsson was appointed Chairman of the Board of Governors as of October 20. Davíð Oddsson needs no introduction, as the former Mayor of Reykjavík, Prime Minister of Iceland for more than 13 years, and most recently Minister for Foreign Affairs. I hereby formally welcome Davíð Oddsson to the Bank and wish him all the best in his work.

A number of changes took place in Central Bank staffing during 2005. Thirteen employees left or retired from the Bank and fourteen were hired, so their number increased by one during the year. At the end of 2005 there were 116 employees at the Central Bank of Iceland, while the number of full-time equivalent positions was just over 107.

Ingibjörg Sólrún Gísladóttir resigned from the Supervisory Board in 2005. I would like to thank Ingibjörg Sólrún Gísladóttir for her work on the Supervisory Board. Jón Þór Sturluson, who had previously been an alternative member, was elected to the Board by Parliament to replace her. Ellert B. Schram was then elected as alternative member in his place. The Supervisory Board held 22 meetings during the year. I would like to thank the members of the Supervisory Board for their particularly pleasant cooperation and fine work. I also thank the Board of Governors and employees of the Bank for their very good work during the year and fruitful collaboration with the Supervisory Board.

Last year was a very eventful time for the Central Bank of Iceland and the current year looks likely set to be equally eventful. I am convinced that the Central Bank of Iceland will continue, as ever, to perform its role with professionalism and steadfastness.