The Icelandic banking crisis has resulted in the bankruptcy of the three major private commercial banks, Kaupthing, Landsbanki and Glitnir, which accounted for more than 80% of the financial system at the end of 2008, with confidence in banks gradually weakening, leading to sharp devaluation of the Icelandic krona increasing the difficulties of refinancing short-term debts and depleting their deposits.
The main reason was the overgrowth of banks' balance sheets, at a total of ten times Iceland's GDP and with a large share of both foreign assets and liabilities. The Central Bank of Iceland (CBI) could not act as an external lender in foreign currency as its foreign exchange reserves and foreign credit lines did not meet the needs of the banks. A government bailout was also ruled out as the state's resources were scarce compared to the size of the problem and would risk a state bankruptcy.
The first reaction to the financial crisis through the Emergency Liquidity Assistance (ELA) proved to be insufficient, with banks being insolvent with incorrect and unreliable valuations of their assets.
It led the authorities to pass an emergency law that provided for three measures. First, the mandate of the Ministry of Finance to provide funds for restructuring or the creation of new banks. Secondly, the supervisory authorities should take control of the bankrupt banks. Third, the priority of paying off customer deposits over general, unsecured receivables from bankrupt banks.
The problem of the domestic operations of the banks was solved by the separation of the domestic activities from the old bank to a new bank with the aim of maintaining the basic banking services, from these activities abroad. With the Icelandic authorities protecting home deposit holders who had uninterrupted access to their accounts.
The decisions of the Icelandic authorities led to a reform of the banking system structure by reviewing the supervisory instruments and increasing the level of capital required by the banks. Assistance was provided by the International Monetary Fund (IMF) to finance the budget deficit, and capital controls were introduced to launch the IMF program and stabilize the value of the Icelandic krona. The program lasted until 2011, gave credibility in dealing with the Icelandic crisis and stabilized markets.
Descriptive | |||||
|---|---|---|---|---|---|
| Inflation rate | GDP Growth rate | ||||
| N | 27 | 27 | |||
| Mean | 0.0477 | 0.0281 | |||
| Std. error mean | 0.00684 | 0.00700 | |||
| Median | 0.0399 | 0.0400 | |||
| Standard deviation | 0.0356 | 0.0364 | |||
| Minimum | 0.0155 | -0.0700 | |||
| Maximum | 0.155 | 0.0900 | |||
