The Icelandic Financial Crisis
The fullest technical account of the collapse and the capital-controls recovery.
Summary
Asgeir Jonsson was chief economist at Kaupthing before the collapse and later became governor of the Central Bank of Iceland; Hersir Sigurgeirsson teaches finance at the University of Iceland. Together they wrote the most technically detailed account of the Icelandic banking collapse and its resolution.
The analysis covers the banks' growth after privatisation, their funding structure, and specifically the currency mismatch: the banks had assets and liabilities denominated in foreign currency far exceeding the central bank's reserves, which meant no domestic lender of last resort could support them. They cover the funding shift from wholesale markets to retail internet deposits through Icesave and Kaupthing Edge, the cross-holdings and lending against own shares, and the balance sheet positions at the point of failure.
The resolution material is the book's distinctive contribution. Iceland split each bank into a domestic entity holding domestic deposits and assets, which continued operating, and an estate holding the foreign assets and liabilities, which was wound up. Foreign creditors were not made whole and the state did not guarantee them. Capital controls were imposed and remained for years, and the eventual liberalisation involved a stability contribution extracted from the estates. The authors argue that this resolution was more successful than the alternatives adopted elsewhere, and that Iceland's outcome supports letting banks fail. The book is technical and assumes financial knowledge. Jonsson's position inside one of the failed banks should be weighed.
Key takeaways 7
- Icelandic banks held foreign currency liabilities far exceeding the central bank's reserves, which made a domestic lender of last resort impossible.
- A small country cannot support banks whose foreign currency obligations exceed what its central bank can supply.
- Iceland split each bank into a continuing domestic entity and an estate holding foreign claims, which allowed the payment system to keep working.
- Foreign creditors bore losses that other countries transferred to their taxpayers, and Iceland's outcome was better as a result.
- Capital controls imposed in 2008 lasted years and their removal required extracting a stability contribution from the bank estates.
- The banks lent against their own shares and held each other's paper, which meant their reported capital was partly circular.
- Jonsson worked at one of the failed banks, which readers should weigh against the account's judgements.
Who should read it
Analysts of banking resolution and small-country financial stability who want the technical account and the case for imposing losses on foreign creditors.
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