Iceland’s Failed Banks: A Post-Mortem
Following a period of extraordinary growth, the three largest Icelandic bankswere taken into government custody in early October, 2008. As the domesticeconomy had grown and stock prices had soared, the three banks’ assets hadexpanded from “100 percent of GDP in 2004 to 923 percent at end 2007”(IMF (2008), page 12). The Icelandic economic euphoria was crushed by thelarge banks’ failures. In the wake of these failures, the Icelandic governmenttook over the banks and guaranteed 1,212 billion ISK of domestic deposits.The government (or central bank) will probably also reimburse some depositorlosses in Great Britain, the Netherlands, Germany, and Sweden.
How could things have gone so terribly wrong? The purpose of thisReport is to respond to the first two points listed in the legislation creatingIceland’s Special Investigation Commission:
“1. Seek to clarify as well as possible the events leading to, and the reasonsfor, the difficulties of the Icelandic banking system that caused Parliamentto enact Act No.125/2008, empowering the State Treasury to allocatefunds on account of a special situation in the financial market, etc.“
2. Collect information on the operations of financial institutions thatmay clarify their difficulties, such as financing, lending policies, ownership,audit, and their links to business and industry.” (Althingi Act number142/2008, Chapter I, Article 1).
Any firm’s failure reflects some combination of bad luck and bank management.Which was more important for the Icelandic banks’ demise?
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