Speaker 1: So now we're going to take a look at a dive in the next session, next couple of sessions, into the whole issue around business. I think as we heard yesterday one of the issues with social progress is it's not just one sector's responsibility. Social progress is not the responsibility just of government, just of the voluntary sector, just of business. It's one about collaboration. Business has a crucial role to play in finding solutions and driving social progress. So we're going to take a number of sessions now to have a look at the role of business in driving social progress. But to kick us off, we're going to have an interview now. We're going to look at the case study of Arion Bank here in Iceland, one of the general sponsors of this conference, and a fascinating institution that's gone through an interesting transition over the last few years. Very glad that we've got Stefan Bloddy-Gudjonsson, the head of research from Arion Bank, to join us here today, who will be in conversation with Matthew Bishop of The Economist. John, Matthew, welcome.

Speaker 2: Thank you very much and some of you will know that Mike Green and I have written, please sit down next to me, Mike Green and I have written several books together, the second of which was a book called The Road from Ruin, which was really about the financial crisis of 2008, how the world got into that mess and then subsequently what we felt needed to be done to get the world back on track. I think unfortunately most of our recommendations were ignored, but one of the things that I think it did help inspire was actually this work around the social progress index, because we realised that focusing narrowly on GDP soaring and profits in the financial sector soaring and profits in the economy soaring was actually a very bad thing to do, because it allowed you to think that in 2006, 2007, 2008, in countries like Iceland, things were going fantastically, when in fact they were evidence of serious risk and bad policy and all sorts of other terrible things. So we do actually mention the UK study of Iceland in the book and it's been quite interesting to hear your reflections. Secondly, I'm going to be talking about this a bit later when we have the panel on impact investing and betting on social progress, I believe that the financial sector of all sectors now in the modern economy is the game changer. If the financial sector is well run and takes its social responsibility seriously, it can really be a powerhouse for sustainable economic growth that really does include everybody in the upside. If it's a badly run financial system, it can do outsized damage to the rest of the economy and to society. So Stefan, I really want to get a sense from you of what is the Icelandic story. I think we've all been struck being here this week that Iceland is not the basket case that it seemed to be in the media a few years ago. Things seem to be pretty good here now. How have you

Speaker 3: turned it around? Well there are of course a few angles to it, but just to revisit Iceland in 2008. There were three major banks in Iceland, so with help of easy access to international capital markets, expanded their operations enormously outside of Iceland. So they amassed a balance sheet in total of 10 times Icelandic GDP. So when financing and buying financial institutions in many corners of the world, financing acquisitions of high street names in the UK, English Premier League teams etc. So sort of extravagant flamboyant type of institutions. And you were working in the industry? I was working in the industry there, yeah. I've been working in the financial industry in Iceland for 16 years. Prior to that I was a business journalist. But what happened when liquidity dried up, you could say the emperor had no clothes and had a domino effect on the society. Because of the size of the sector, the central bank or the government had no means to support the banks. That would have jeopardized the whole economy going forward. We would have put future generations at risk. So basically the banks did collapse. And I think what the general population felt, it was some sort of foundation that you felt was kind of sound and trustworthy. That foundation was more or less swept right under your feet. And so of course that had an effect on how the people of Iceland viewed many other sort of arenas of life. People started asking questions about what type of political system do we have? What kind of educational system do we have? Is the judiciary system sound? Etc. And I think we're still sort of dealing with these questions and we're all constantly asking ourselves these questions. Of course with the help of social media these questions are frequently brought up. And every month in Iceland you have a news story or a report of some sort being published which catches the headlines, which deals with sort of the build-up to the financial crisis and the aftermath of the financial crisis. That's still going on? It's still going on. And from our perspective working in the banking sector, I mean new banks were rebuilt on

Speaker 2: their own. So specifically what happened. So the banks went bankrupt. Yeah. Did

Speaker 3: people lose their savings? Many Icelanders lost their savings. So you had the stock market got wiped out. The corporate bond market got wiped out.

Speaker 2: But checking accounts, savings accounts, they were protected? Domestic savings

Speaker 3: accounts were secured. And so the technical aspects of how the banks were, the new banks were built up and how they were separated from... But the

Speaker 2: decision was to create a new banking system? The decision was to create a new

Speaker 3: banking system. And of course then we've had a number of new banking regulations, mostly from which are based on the directive from the European Union. And so the new banks today are based on much different grounds than those previously. I mean predominantly when it comes to the equity ratios, the liquidity ratios, etc. So and incentives and banking sector was very different from what they were. But still there is this matter of trust. And for us in Iceland, unfortunately opinion polls, for example, they do not show that actually when it comes to trust, when people ask do you trust the banking sector, people are still very much close to where they were five or six years ago. So pretty much the only thing that sort of is gaining trust in Iceland is the volunteer rescue squads we have in Iceland or the Icelandic Coast Guard. But that sort of has to do with what type of, what kind of trust sort of got shattered in the financial crisis.

Speaker 2: But the new banks have done reasonably well. They're attracting savings, they're

Speaker 3: attracting customers and so forth. The new banks have been doing quite well. I mean the majority of the banking sector in Iceland is between three major banks. Two of them are currently government-owned. Arjobank is not government-owned. And there is a lot of discussion going on in Iceland right now sort of where do we head from now. So what kind of banking sector do we want to have? And does it make a difference in how you

Speaker 2: perceive that you're a private bank as opposed to a government-owned bank?

Speaker 3: Of course we perceive it differently. But of course the general framework is the same for the banks and they operate at the same competitive level. So at the core of it, being a bank in a society that sort of went through the financial crisis in a way that Iceland did, I think the main issue for us is just to do our business, do core banking well and service the population exceptionally well, etc.

Speaker 2: But no financing Premier League football teams?

Speaker 3: No, we hopefully won't get there.

Speaker 2: So I suppose there are two sides to this next question which relates to what you need to do differently to be a bank in an economy that's delivering social progress. One would be how do you make sure that you are a responsible lender? What does it mean to be a responsible lender? And has the system here changed its definition of that in the light of what happened in 2008 and 2009? And the other side will be more about what role do you need to play in changing the demand for banking services, particularly helping to have borrowers actually be better informed and making better decisions. So talk a bit about what you've done on both those sides of the equation.

Speaker 3: Yeah, I think if I may start sort of with the bank as a lender, and I think it and maybe touching on the difference between what we are experiencing now and before. Prior, I think the viewpoint of the banks was it was way too short. The horizon was just too short. It was just looking year ahead or even months ahead, both for the banks and the shareholders of the bank and the banks management. Today I think banks need to, and I sincerely hope we are, and not just banks, just decision makers and economic analysts as well. We have to keep constantly in mind that we are sort of parenting the future. But what has been happening in Iceland is sort of public or household debt and corporate debt has been coming down significantly in Iceland. Even though we've had the economy growing, debt levels of corporations and the public is now at a very similar level as to what it is in the Scandinavian countries, for example. So we are at a much healthier level. Of course, we were kind of concerned that as we would have the economy rebounding, we would start behaving like Icelandic consumers did before, just spending and taking out leverage, etc. But that has definitely not been the case so far. Has that been because of your restraints as

Speaker 2: banks or because of the restraint of the customers? Both, but I think it has more to do

Speaker 3: with the mentality of the population. But I would like to think that the banks have something to do with it as well. But then coming back to how the mentality is changing and how it has to change, of course we have regulations, different regulations, but that's just one side of it. The other side of it is what do you do? How can you behave to promote more responsible consumers, more responsible clients? We have been doing that throughout educational frameworks we're running. Personally, I would like to have much more of a financial education, practical financial tax being put to students of all ages in the schooling system. But what are you

Speaker 2: actually doing short of that in terms of the bank itself? The bank itself is

Speaker 3: promoting various projects. It has a number of events where we specifically target specific age groups. So we're thinking both in terms of large events, even events like this, or events where economists are addressing young people especially. And then we have smaller events where we're specifically targeting people of certain ages, etc. But at the core of it as well is going through what Iceland has gone through, what trust do you have to be promoting financial soundness, etc. So I think for us we are striving at being as transparent as we can. And that not only has to do with Aryan Banking, but has to do with the banking sector and the financial sector, the political sector as well. Because most information is just a mouse click away. I suppose everyone in the financial

Speaker 2: sector around the world now is trying to answer this question, but how do you restore trust? I mean you haven't been able to really restore trust. No, we haven't. No, that's true. I mean obviously that's essential for your long-term growth that you have customers that generally have reasonably high levels of trust in you. What do you need to do now to change that?

Speaker 3: I think just be, at the core, just be good banks. You think eventually time will heal? No, and I think you need to do more than that of course, but that's just at the core of it. At the same time you need to, I think the financial sector in general needs to be more vocal as well. It has to explain itself. It has to do more than just explaining the rationale behind decisions that are made. Explain to the population what has changed, what is changing, how do we see the world going forward, the financial market going forward. I think we should, we can do more in participating in a public discussion on where we are heading. That's one of the few things I would like the Icelandic banks to do more. I think that would help us to regain, rebuild some of the trust which I hope we learn. I'm going to turn it to the audience in a

Speaker 2: second, but one last question from me. I can't help but notice in the conversations I've had with Icelanders here that people are starting to worry that the economy is overheating again, that the currency is getting stronger, people are buying foreign cars again, all that sort of thing. Do you think

Speaker 3: history could repeat itself? We have gone through, Iceland has gone through boom-and-bust cycles for decades. The last boom-and-bust cycle was because of over-leverage and an over-leveraged banking system. I don't think the next bust we will have will be because of an over-leveraged banking system. Prior to that, most booms we had were because of over-fishing or the drop in fish prices or the Krona would over-appreciate and then drop in value. The current economic growth, which is phenomenal and has way surpassed our expectations, has been driven by tourism. We expect to have more than two million tourists.

Speaker 2: So you worry that that bubble could burst? I think most scenarios

Speaker 3: you would have would have some sort of a bubble bursting in the tourism sector. So I think a key task now for the government and for decision-makers in the tourist industry is how can we curb this exponential growth? How can we manage it? Because I guess the people in the east part of Iceland or in the western part of Iceland, they're thinking well we can easily have more tourists coming to us, so how can we... it's just to manage it better and then to curb this exponential growth and to make it sustainable. If we manage to do that successfully, then this is going to be a core business for us going forward. Great, let's have a

Speaker 2: question or two from the audience. Gentleman right at the back there.

Speaker 4: Thank you. A two-part question. How much of the crisis in Iceland was due not to over-leverage but investments in derivatives, with Iceland effectively acting like a hedge fund? And then on this question of rebuilding trust and derivatives, do derivatives create a larger risk in the financial system globally because they're so big and the next time any crisis comes we run the risk of making it much bigger and accelerating it?

Speaker 3: I think this is a very fair and a very... this is a correct question because we have the derivatives markets growing and in essence, I mean the logic behind the derivatives markets or derivatives to curb excessive fluctuations. I'm concerned about that. But in terms of Iceland, I think the derivatives played a part. We obviously, or the financial institutions and investors, had not a clear understanding of what the underlying risk was, but that's just at the core of it. You need to know the underlying risk. So I agree with you in that, that the derivatives markets can potentially, and may be today, increasing risk instead of managing it or keeping it at a manageable level. Because, and honestly, I think you can't say in full honesty that the financial institutions or investors know at the core what is included, what underlying risk there is. So even today, you still see that

Speaker 2: lack of transparency.

Speaker 3: I think we can improve on it. And I think we're continuing to do that.

Speaker 2: Sorry, another question. Over here. The microphone will come to you.

Speaker 5: Oh, you've got it. My name is Robert Witvinson. I'm an Icelandic businessman. I was a lucky one who lived out of Iceland in 2008. I'd moved out to US in 2005. So I was watching the crisis from US, not from Iceland. I would ask Stefan Brody, do you believe, are you pretty convinced that how the assets were distributed to the new owners, all the small companies where the equity was lost, the owners walked away with nothing, are you sure, are you convinced by yourself that the Icelandic banks, like yours, did the right job, good job, to distribute the assets again?

Speaker 2: Okay, you better just explain to us what happened a little bit.

Speaker 3: It has to do with sort of rebuilding of the new banks and how to sort of rebuild the companies which sort of fell into the hands of the banks following the crisis. And, of course, banks are not, at the core, they're perfect owner and should not be owners of a large part of any economy. And this is a debate, it's one of those debates which are very, very open in Iceland and will continue for a number of years, I presume, because, I mean, we're still, we're nine years from the crisis almost and it's still sort of one of those topics which is discussed. What we have, at least, we have a fully functional banking sector. But if it was done correctly or in a very just fashion, of course, I don't have the mandate to speak for Arjen Banke, but it's just difficult for me to say. I think what we at least have, and we are, in a sense, we are talking about, in many ways, decisions that were made under pressure after time of the crisis or in the aftermath of the crisis. So, I think we should sort of, it's easier to now, eight years later, eight or nine years later, to have a different opinion on what was done. But in fairness, I think we have a functional banking sector, which I think has done a decent job, but if it was fair or not, if it was correct, if it could have been done differently, for sure. Was everything, was all the decisions perfect? Definitely not, but in general, I think we have done a decent job of recovering the banking sector and the economy.

Speaker 2: Well, I've caught various people's eyes and seen various hands being raised to the extent that I'm convinced we could probably conduct a full inquest into the response to the crisis here for the next few hours. And I won't go there because the clock is saying zero, but I think it's a very, very interesting story. And it's, you know, I think lots of lessons for everyone as they think about how their banking systems have come out of the crisis. And thank you very much, Stefan. And I know that as tourists, part of the tourist boom, all of us here, I think, have had such a good time. I'm sure we'll not prove to be a bubble. We'll be back again at some point in the future. So thank you very much, Stefan. Thank you.