The banking crisis in Iceland

This paper covers the banking crisis in Iceland that started in 2008. This crisis was unprecedented for the speed of its onset and the scale of bank failures. The paper focuses on the authorities' response, discussing measures such as Emergency Liquidity Assistance and showing the importance of the emergency legislation and newly adopted resolution powers. These let the authorities take control of the failing banks, create new and viable ones from them and establish depositor preference. The paper also touches on the capital controls introduced under the IMF programme. The Icelandic crisis offers important lessons, which may be relevant to other countries and authorities. These include the need to address operational challenges when creating new and viable banks, the importance of keeping the payment system fully operational during a crisis, the role of public sector support in the early stages of the crisis response and the complexity of designing an exit from capital controls.

JEL classification: F34, G01, G21, G28, G33

Keywords: classification: capital controls, devaluation, bad assets, bank split, auctions, composition agreement, supervision, bank failure, regulation