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This paper documents how the Icelandic banking system grew from 100 percent of GDP in 1998 to 900 percent of GDP in 2008, when it failed during the global financial crisis. We base our analysis on data from the country’s three largest banks that were made public when the Icelandic parliament lifted, among other things, bank secrecy laws in order to investigate the run-up to the financial crisis. We document how the banks were funded and where the money went, using a comprehensive analysis of their lending. The recovery from the crisis was based on policy decisions that, in hindsight, seem to have worked well. We analyze some of these policies—including emergency legislation, capital controls, alleviation of balance of payments risks, and preservation of financial stability. We also estimate the crisis’s output costs, which were about average when compared with the 147 banking crises documented by Luc Laeven and Fabián Valencia (2012) and the 100 banking crises documented by Carmen Reinhart and Kenneth Rogoff (2014). Our computation of the Icelandic government’s direct costs reveals that its recently concluded negotiations with foreign creditors may even leave it with a net surplus as a consequence of the crisis. However, there is still uncertainty about the ultimate cost, and our benchmark estimate is that the cost was about 5 percent of GDP. We summarize several lessons from the episode.

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 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 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 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 lesson that floating exchange rates can be hazardous in the presence of large capital flows. The central bank raised interest rates during the boom years in order to meet an inflation target. This created an interest rate differential with other countries that encourages a large volume of carry trades and incentivized domestic agents to bonow in foreign currency. Both conspired to create an asset price bubble, excessive currency appreciation and - counter-intuitively - high inflation. The result was that monetary policy as conducted was ineffective at curbing domestic demand. The eventual large depreciation of the cunency made a large section of the economy insolvent. Finally, there are lessons about the European passport system in financial services and the common market. The Icelandic banks had the right to set up branches in the European Union by means of the passport on the explicit assumption that home regulators were exercising adequate controls. The collapse of the banks left the United Kingdom and the Netherlands with significant costs, demonstrating the inherent weakness in the passport when one member country can undercut the supervisory standards of other member countries. For the passport system to work, the home supervisor must be trustworthy.

There is a common belief that economic crisis will lead to a decrease in subjective wellbeing. Previous studies indicate that income is correlated with happiness and unemployment with unhappiness. The relationship between increased income and happiness is well documented while the impact of decreased income has been less explored. The aim of this paper is to study how the economic downfall in Iceland, followed by reduced income and increased unemployment, affects happiness as well as to explore which groups are most vulnerable to changes in happiness and which are most resilient. The study is a longitudinal, nationally representative postal survey which assessed 5,918 individual's aged 18–79. A total of 4,092 (77.3%) answered again in 2009. The relationship between economic factors and happiness was explored using multiple linear regression to find out how much they explain of the happiness variance and the changes in happiness, together with demographic factors, health and social relationships. Results indicate that income and unemployment did not predict happiness but financial difficulties did. A decrease in happiness was detected after the collapse. The change in happiness from 2007 to 2009 was normally distributed, 40% had the same score in both years and an equal number increased as decreased. The explored factors did not explain the changes in happiness. The economic crisis had a limited affect on happiness. Those with financial difficulties were hardest hit. Changes in happiness need to be studied further since they are not well explained by the factors which influence cross-sectional levels of happiness.

In the fall of 2008, the three largest banks in Iceland collapsed, with severe and lasting consequences for the Icelandic economy. This article discusses the 'Icelandic banking crisis' in relation to the notion of corporate social responsibility (CSR). It explores some conceptual arguments for the position that the Icelandic banking crisis illustrates the broad problem of the indeterminacy of the scope and content of the duties that CSR is supposed to address. In particular, it is suggested that the way the banks in question conceived of CSR, i.e. largely in terms of strategic philanthropy, was gravely inadequate. It concludes by proposing that the case of the Icelandic banking crisis gives us a reason to rethink CSR.

Purpose - The purpose of this paper is to examine the extreme case of the Icelandic banking crisis in relation to critical governance issues at governmental, industry and civil society levels.Design methodology approach - This is a case study of the Icelandic banking collapse in 2008.Findings - The examination of governance failures within the Icelandic banking system reveals that government institutions need to find a balance between entrepreneurial growth, risk exposure and sustainable societal development. A euphoric attitude of laissez-faire, where risk issues and issues of balanced development are largely ignored, creates challenges for sustainable banking. The findings suggest that achieving the necessary balance requires stressing governance issues on three levels; at the government level; at the industry level; and at the civil society level.Practical implications - The paper illustrates why some of the corporate governance challenges facing sustainable banking should be addressed at multiple levels. Government should strive for realistic information and evaluation of societal risks; government should implement adequate regulatory frameworks; the finance industry itself should have effective self-regulatory procedures and mechanisms; and, from a civil society point of view, the public at large should have realistic expectations and be adequately alerted as to the potential risks of governance failure.Originality value - The paper examines interactions between governance failures at different levels and has important implications for governance and policy makers, particularly those faced with re-structuring national financial industries.

The Icelandic economy was hit hard by the global economic and financial crisis that started in the fall of 2008. During this crisis the three largest banks all collapsed and many other smaller banks and companies went bankrupt in the aftermath of the crisis with severe consequences for the economy and the people. Prior to the crisis, Iceland, a high income economy, had experienced strong growth rates and unprecedented expansion in overseas investment and activities, especially in the financial sector. This article focuses on action by top government officials during this expansion as well as during and after the collapse of the Icelandic banks. The findings of the study are that the government showed negligence and made mistakes by not taking credible action to manage risks following a rapid cross border expansion of the Icelandic banking system. This had severe consequences and resulted in the collapse of the Icelandic economy in October 2008. The discussion can have a wider relevance than that for Iceland only. This is especially true for small countries with a large banking sector, using their own currency, and with limited fiscal space to support their banks during a crisis.

Iceland's boom and bust replicate in miniature the causes, development and trajectory of the absolutely larger but proportionately smaller American boom and bust, except for Iceland's costly lack of a reserve currency and its banks’ preference not just for speculating in but also overpaying for shaky assets. In the aggregate, both the US and Icelandic economies sold short-term, passive, and liquid assets to the world, consumed part of that borrowing, and reinvested outward in fixed, long-term and active investments. The key differences between Icelandic and US banks are that Iceland's banks made their titanic gambles without the benefit of an international reserve currency. The United States survived its catastrophe and continues to have access to global credit markets without much penalty because the dollar is the international reserve currency. By contrast, Iceland has mortgaged its economy and economic independence for decades to bail out banks that had overpaid for dodgy assets.

This book analyzes the European Great Recession of 2008-12, its economic and social causes, its historical roots, and the policies adopted by the European Union to find a way out of it. It contains explicit debates with several economists and analysts on some of the most controversial questions about the causes of the crisis and the policies applied by the European Union. It presents the cases of Iceland, Greece and Ireland, the countries that first declined into crisis in Europe, each of them in a different way. Iceland is a case study for reckless banking practices, Greece of reckless public spending, and Ireland of reckless household indebtedness. At least seven other countries, mostly from the peripheries of Europe, had similarly reckless banking and spending practices. In the center of the book are the economic and social causes of the crisis. Contemporary advanced capitalism became financialized, de-industrialized and globalized and got rid of the \"straitjacket\" of regulations. Solid banking was replaced by high-risk, \"casino-type\" activity. The European common currency also had a structural problem - monetary unification without a federal state and fiscal unification. The other side of the same coin is European hyper-consumerism. A new lifestyle emerged during two super-prosperous periods in the 1950s to 1960s, and during the 1990s to 2006. Trying to find an exit policy, the European Union turned to strict austerity measures to curb the budget deficit and indebtedness. This book critically analyzes the debate around austerity policy. The creation of important supra-national institutions, and of a financial supervisory authority and stability mechanisms, strengthens integration. The correction of the euro's structural mistake by creating a quasi-fiscal unification is even more important. The introduction of mandatory fiscal rules and their supervision promises a long-term solution for a well-functioning co