Iceland’s financial supervisory authority: Tight supervision
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| “We didn’t foresee the increased real estate activity. We made changes to the Housing Financing Fund. The banks came into the market aggressively, and interest rates went down and prices up. The timing had the effect of increasing pressure on the economy” Árni Mathiesen, finance minister, Iceland |
Why did the events of February and March take place and is there anything that the government could have done to prevent them? The krona was overvalued; to some extent it’s as simple as what goes up, must come down. The valuation of the krona was due to high interest rates, which were required because of pressure on the economy. And that pressure was mainly due to two factors: the power and aluminium investment projects in the east; and changes in the housing sector. The power and aluminium projects had been foreseen and we planned to reduce the investment activities of central government in order to counteract that.
However, we didn’t foresee the increased real estate activity. We made changes to the Housing Financing Fund, which had previously been dominant in the housing market.