Icelandic financial crisis : causes, consequences and lessons learned

Abstract

Known for being one of the poorest nations in Europe to becoming one of the most prosperous economies in the West, the small island of Iceland suffered tremendously when its three major banks accounting for almost all of its banking system, collapsed in October 2008 as a result of the global financial crisis. This dissertation seeks to analyse the events that lead to the collapse, the broad range of systemic reforms implemented by Iceland to mitigate the consequences of the crisis, the current recovery situation and, most importantly, the lessons learned from this episode. Since this dissertation only discussed past events, data was obtained through secondary sources. Various sources of literature were considered, including books and articles found in academic journals. The key findings of this study exhibit that, similarly to the U.S., Iceland’s economy experienced a property pricing bubble as a result of their large exposure to the property market. Moreover, the privatisation and liberalization together with the lack of supervision in Iceland’s banking sector proved to be catastrophic for the country’s economy. The repercussions that followed were notably evident as the GDP growth rate, unemployment rate and government debt to GDP ratio had all reached unprecedented levels. As part of the recovery process, Iceland sought assistance from the IMF, committing itself to a stand-by arrangement with specific focus on restoring and rebuilding confidence within the financial system. As it stands in 2017, Iceland has made a full recovery and its economy is set to boom once again. Furthermore, Iceland’s economic collapse and subsequent recovery holds vital lessons for other small economies, for larger economies, and for financial regulation generally.