Lessons from a collapse of a financial system
The paper draws lessons from the collapse of Iceland’s banking system in October 2008. The rapid expansion of the banking system following its privatization in the early 2000s is explained, as well as the inherent fragility due to the size of the banking system relative to the domestic economy and t...
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ftrepec:oai:RePEc:oup:ecpoli:v:26:y:2011:i:66:p:183-235. 2024-04-14T08:13:42+00:00 Lessons from a collapse of a financial system Looting: The economic underworld of bankruptcy for profit Monetary turbulence and the Icelandic economy Causes of the collapse of the Icelandic banks – responsibility, mistakes and negligence ‘The Icelandic banking crisis and what to do about it: The lender of last resort theory of optimal currency areas’ Financial Innovation, Regulation, and Reform Collapse of a country Entranced by banking Credit growth, problem loans and credit risk provisioning in Spain Iceland’s failed banks: A post-mortem Criticism of Icelandic economy does not square with the facts The invisible hand and the grabbing hand Eleven lessons from Iceland Iceland: 2010 Article IV Consultation and Third Review under Stand-By Arrangements and Request for Modifications of Performance Criteria – Staff Report; Staff Supplement; Public Information Notice and Press Release on the Executive Board Discussion; and Statement by the Executive Director for Iceland Credit cycles, credit risk, and prudential regulation ‘Icelandic banks: Not what you are thinking’ Weathering the financial storm: The importance of fundamentals and flexibility Banking crisis management in the EU: An early assessment The winner’s curse in banking Corruption Speech at the Turner Review press conference, 18 March, Financial Services Authority, London Sigridur Benediktsdottir Jon Danielsson Gylfi Zoega http://hdl.handle.net/10.1111/j.1468-0327.2011.00260.x unknown http://hdl.handle.net/10.1111/j.1468-0327.2011.00260.x article ftrepec 2024-03-19T10:38:24Z The paper draws lessons from the collapse of Iceland’s banking system in October 2008. The rapid expansion of the banking system following its privatization in the early 2000s is explained, as well as the inherent fragility due to the size of the banking system relative to the domestic economy and the central bank’s reserves, market manipulation enabling bank capital to expand rapidly and the weak and understaffed public institutions. Most of Iceland’s banking system was traditionally in state hands but was privatized and sold to politically favoured entities at the turn of the century, with laws and regulations subsequently changed to facilitate the expansion of the banking system. Political connections and the tacit support of the authorities enabled senior bank managers and key shareholders to extract significant private benefits while shifting risk to domestic and foreign taxpayers and foreign creditors. These problems were exacerbated by symptoms of what the paper terms the small country syndrome. The size of the banking sector made the central bank incapable of serving as the lender of last resort. The domestic supervisor, the central bank and the ministries in charge of economic affairs were understaffed and lacking in experience in how to manage a large financial sector. The rapid growth was also ultimately unsustainable due to high levels of leverage and a weak capital base due to both the rapid expansion of balance sheets and lending to finance investment in own shares. The episode demonstrates the importance of closely monitoring rapidly growing financial institutions and even possibly slowing growth when institutions are systemically important. One lesson to be drawn from the crisis relates to the role of politics in a financial crisis. The Icelandic authorities as a matter of policy encouraged the creation of an international banking centre. This involved the privatization and deregulation of the banking system, rules and regulations being relaxed and the neglect of financial supervision. Another ... Article in Journal/Newspaper Iceland RePEc (Research Papers in Economics) |
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The paper draws lessons from the collapse of Iceland’s banking system in October 2008. The rapid expansion of the banking system following its privatization in the early 2000s is explained, as well as the inherent fragility due to the size of the banking system relative to the domestic economy and the central bank’s reserves, market manipulation enabling bank capital to expand rapidly and the weak and understaffed public institutions. Most of Iceland’s banking system was traditionally in state hands but was privatized and sold to politically favoured entities at the turn of the century, with laws and regulations subsequently changed to facilitate the expansion of the banking system. Political connections and the tacit support of the authorities enabled senior bank managers and key shareholders to extract significant private benefits while shifting risk to domestic and foreign taxpayers and foreign creditors. These problems were exacerbated by symptoms of what the paper terms the small country syndrome. The size of the banking sector made the central bank incapable of serving as the lender of last resort. The domestic supervisor, the central bank and the ministries in charge of economic affairs were understaffed and lacking in experience in how to manage a large financial sector. The rapid growth was also ultimately unsustainable due to high levels of leverage and a weak capital base due to both the rapid expansion of balance sheets and lending to finance investment in own shares. The episode demonstrates the importance of closely monitoring rapidly growing financial institutions and even possibly slowing growth when institutions are systemically important. One lesson to be drawn from the crisis relates to the role of politics in a financial crisis. The Icelandic authorities as a matter of policy encouraged the creation of an international banking centre. This involved the privatization and deregulation of the banking system, rules and regulations being relaxed and the neglect of financial supervision. Another ... |
format |
Article in Journal/Newspaper |
author |
Sigridur Benediktsdottir Jon Danielsson Gylfi Zoega |
spellingShingle |
Sigridur Benediktsdottir Jon Danielsson Gylfi Zoega Lessons from a collapse of a financial system |
author_facet |
Sigridur Benediktsdottir Jon Danielsson Gylfi Zoega |
author_sort |
Sigridur Benediktsdottir |
title |
Lessons from a collapse of a financial system |
title_short |
Lessons from a collapse of a financial system |
title_full |
Lessons from a collapse of a financial system |
title_fullStr |
Lessons from a collapse of a financial system |
title_full_unstemmed |
Lessons from a collapse of a financial system |
title_sort |
lessons from a collapse of a financial system |
url |
http://hdl.handle.net/10.1111/j.1468-0327.2011.00260.x |
genre |
Iceland |
genre_facet |
Iceland |
op_relation |
http://hdl.handle.net/10.1111/j.1468-0327.2011.00260.x |
_version_ |
1796311740568305664 |