Iceland Banking Crisis the Banking Crisis That Term Paper

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Iceland Banking Crisis

The banking crisis that occurred in Iceland first emerged in 2008 and continued for a few years by most accounts. The small country had experienced a vast number of consolidations of banking and financial services over the years and there were only a few dominate players in this industry. Much of the industry had been opened up through liberalization in the industry's regulations that had allowed for a string of mergers and acquisitions to consolidate the industry. In the beginning there seemed to be a lot of advantages to this strategy. One of the benefits is that the industry was able to produce quantities of scale that allowed for expenses related to things like transaction costs to be reduced.

Another advantage to financial deregulation was that the larger firms that emerged had more bargaining power due to their pooled resources to be able to secure investments with higher returns. It is often the case that liberalization policies are perceived as solely negative however there are some advantages that can be gained through deregulation as well. Yet, at the same time, allowing for financial speculation from banking institutions carries a significant amount of risk. Iceland significantly deregulated its financial industry to the extent that banks could use deposit accounts to attempt to make a profit for the bank.

Under the deregulations that began in 2001, the three major banks grew significantly and used to create debts when foreign companies were bought.

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The banks began to accumulate large amounts of this debt in which it would perpetually take out new loans and refinance the debts to maintain solvency. However, the growth of the debts became so massive that the costs of refinancing steadily increased until the point in which the debts could no longer be refinanced. In October 2008, all three of Iceland's major banks collapsed and none failed more spectacularly than Kaupthing, the bank whose glass headquarters were on the waterfront; at one point before the banking collapse, it had a balance sheet four times as large as the annual economic output of the entire country (Popper, 2014).

The government of Iceland had to quickly to control of the entire banking industry or else the industry would have gone bankrupt. The country nationalized the banking industry however it did so in a unique way. The country simply did not have enough resources to save the banks like the….....

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