During the current financial crisis which started in the year 2007 with the bust of the
American housing market and peaked with the collapse of Lehman Brothers we
observe that many countries face difficulties with their domestic banking system.
For instance Germany had problems with several Landesbanken, the Hypo Real
Estate (HRE) and with Commerzbank or the United States struggled with the
collapse of Merrill Lynch and Bear Stearns leading to an enforced merger with Bank
of America and JP Morgan Chase respectively. In other countries problems in the
banking system were more dramatic. After rumors in the United Kingdom about a
collapse of Northern Rock people went immediately to the branches to withdraw
their deposits. The picture spread the world when people waited outside in a queue
of a branch of Northern Rock to get inside. To prevent a domestic bank run in the
United Kingdom the government nationalized several financial institutions such as
Royal Bank of Scotland; afterwards holding a stake of 95% in this particular
institution. Nowadays Spain faces a huge banking crisis after the bust of the Iberian
housing bubble. But what is the problem of having a banking crisis?
Table of Contents
I. Introduction
II. Economic Crisis in Iceland 2008 – ongoing
II.1. History of Iceland
II.2. Evaluation of the Banking Sector
II.3. Collapse of the Banking Sector
II.4. Steps done to solve the Economic Crisis
II.5. Conclusion
III. Bibliography
Objectives and Topics
This paper examines the Icelandic financial crisis of 2008, analyzing the transition from a systemic banking collapse to a sovereign debt crisis. The central research objective is to identify the underlying causes of this failure and to derive lessons for future financial stability and regulatory frameworks.
- The historical development and privatization of the Icelandic banking sector.
- Evaluation of excessive balance sheet growth and reliance on short-term interbank financing.
- The spillover effects of financial distress across different sectors of the economy.
- The role of the IMF and government interventions in stabilizing the domestic economy.
- Critical analysis of international bank supervision and the "too big to fail" dilemma.
Excerpt from the Book
II.3. Collapse of the Banking Sector
Due to highly relying on short term financing and lending to Icelandic investment companies Icelandic banks were highly dependent on favorable market conditions. With this strategy Icelandic banks acted like a hybrid of typical investment banks. In a direct way on the passive side with its dependence on short term refinancing and in an indirect way on the active side with lending to investment companies as these companies are dependent on favorable stock market performance. Of course the underlying depends on the focus of the debtors and could have been bonds, rates, foreign exchange or commodities as well.
In this graphic we see how the Icelandic stock market developed from the year 2003 until the year 2009 compared to the Euro zone, United Kingdom and the United States. Iceland outperformed the other stock markets tremendously. At the peak of mid 2007 the market capitalization of the Icelandic stock market was 2.5 times the GDP of the country itself. Compared to Iceland the United Kingdom had the next highest multiplicator with 1.25 at the same time. As stocks were used as collateral from the Icelandic investment companies to get loans from banks the high valuation of the stock market helped to fuel the credit expansion in Iceland. After mid 2007 the ratio of Iceland declined very fast which implies that either the GDP increased a lot or the market capitalization decreased. What strikes out is the fact that already before the American investment bank Lehman Brothers collapsed Iceland experienced an economic slowdown.
Summary of Chapters
I. Introduction: This chapter contextualizes the global financial crisis and presents the core research questions regarding the Icelandic systemic collapse.
II. Economic Crisis in Iceland 2008 – ongoing: This section provides a comprehensive analysis of the Icelandic crisis, covering historical background, banking sector evaluation, the causes of the collapse, recovery measures, and final conclusions.
II.1. History of Iceland: An overview of Iceland's economic structure, its energy-intensive industry, and the deregulation process leading up to the 2008 crisis.
II.2. Evaluation of the Banking Sector: An examination of the rapid growth and risky funding strategies of Icelandic banks that made them highly vulnerable to global market turmoil.
II.3. Collapse of the Banking Sector: An analysis of how dependency on short-term refinancing and stock market performance led to the eventual collapse of the major Icelandic financial institutions.
II.4. Steps done to solve the Economic Crisis: A review of the government's intervention, the IMF Stand-By Arrangement, and the implementation of capital controls to stabilize the currency.
II.5. Conclusion: Synthesizes the findings to highlight critical lessons regarding bank supervision, cross-border financial activity, and the limits of state bailouts.
III. Bibliography: A detailed list of academic and official sources used to support the research arguments.
Keywords
Iceland, Banking Crisis, Sovereign Debt Crisis, Financial Stability, IMF, Capital Controls, Interbank Money Market, Economic Stabilization, Risk Management, Bank Supervision, Balance Sheet Approach, Financial Liberalization, Lehman Brothers, Monetary Policy, Too Big to Fail.
Frequently Asked Questions
What is the primary focus of this paper?
The paper focuses on the Icelandic banking crisis of 2008, investigating how the country moved from a systemic financial sector collapse to a broader sovereign debt crisis.
What are the central themes discussed in this document?
Central themes include the rapid liberalization and growth of Icelandic banks, their reliance on risky short-term interbank funding, the impact of stock market performance on banking stability, and subsequent government stabilization efforts.
What is the primary research question being addressed?
The research seeks to answer why the Icelandic financial system collapsed and what specific lessons can be learned from this event to improve future financial stability.
Which scientific methods or approaches are utilized?
The author primarily employs a descriptive and analytical approach, utilizing the "Balance Sheet Approach" (BSA) to explain spillover effects and analyzing macroeconomic data from the Central Bank of Iceland and the OECD.
What topics are covered in the main section of the paper?
The main section covers the history of Iceland's economy, the development of the banking sector, the mechanics of the market collapse, recovery steps like the IMF Stand-By Arrangement, and a concluding discussion on regulatory lessons.
Which keywords best describe the content of this thesis?
Key terms include Iceland, Banking Crisis, Financial Supervision, IMF, Capital Controls, and Interbank Money Market.
Did the collapse of Lehman Brothers act as the sole trigger for Iceland's crisis?
The author argues that while the Lehman Brothers collapse exacerbated the situation, financial markets had already begun to reprice risks in Iceland in late 2007, suggesting Lehman was likely the "last straw."
How did the "Balance Sheet Approach" explain the crisis?
It illustrated how a liquidity shock in the banking sector (the inability to refinance interbank loans) necessitated government intervention, which in turn put massive pressure on the central bank and national debt.
What is the author's stance on the supervision of banks with foreign branches?
The author advocates for clearer responsibilities, proactive international collaboration, and suggests that requiring foreign banks to operate via subsidiaries rather than branches could improve supervision and accountability.
- Citar trabajo
- Malte Vieth (Autor), 2012, Iceland 2008. From a Banking Crisis to a Sovereign Debt Crisis, Múnich, GRIN Verlag, https://www.grin.com/document/271200
