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 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…
Popper, N. (2014, January 15). After Crisis, Iceland Holds a Tight Grip on Its Banks. Retrieved from The New York Times: http://dealbook.nytimes.com/2014/01/15/after-crisis-iceland-holds-a-tight-grip-on-its-banks/?_r=0
Iceland's Economic Crisis Web Iceland's bankruptcy The purpose of banking in Iceland: speculation and hedging The central issue: too much too soon Iceland's Transition Replicating Wall Street Taking on foreign "assets" at a ratio to GDP of 10:1 Is debt an asset? Easy credit and the role of the Housing Financing Fund Low interest rates f. Inflation g. The end of short-term financing in the wake of Lehman's collapse h. The bubble bursts The plight of the average citizen j. Aliber's speech k. Left holding the
Iceland The location of the launch of the bed & breakfast chain is Iceland. Iceland is a modern democracy with the capitalist economy. Tourism is a relatively minor sector of the Icelandic economy, but has been growing in importance in recent years (CIA World Factbook, 2014). Iceland's main draws are its natural scenery complete with volcanoes, mudfields and other geothermal wonders, as well as waterfalls and the city of Reykjavik, which
Financial Crisis The American banking system was in crisis from late 2007 through to early 2009. The subprime mortgage crisis had left many banks with large amounts of so-called "toxic assets" on their books, mainly in the form of subprime mortgages and mortgage-backed securities that were now under water. The mortgage-backed securities were one of the biggest problems, because they were presented as being of investment grade, which did not align
Deregulation The Glass-Steagall Act of 1933 was the first major attempt at regulating the financial industry. The Act was passed by President Roosevelt with the objective of restoring public confidence in the banking system. Glass-Steagall sought to, among other things "prevent the undue diversion of funds into speculative operations," in response to the market crashes that had sparked the Great Depression (Maues, 2013). The reason for this was simple -- speculation
Over the next three and a half years they grew to over $140 billion" (Lewis 2009, p.1). "By 2006 the average Icelandic family was three times as wealthy as it had been in 2003, and virtually all of this new wealth was one way or another tied to the new investment-banking industry," while the real estate market, so vitally necessary to the lifestyle of most Icelanders, also expanded stratospherically.
This program is focused onto the following directions: Generating stability with exchange rates Rebuilding confidence in the monetary policy Better managing and restricting public debt Reforming and restructuring the banking sector to insure more transparency and the implementation of internationally recognized policies (The Icelandic Government Information Center, 2008). 4. Short-term forecast for the economy The 2008 has severely impacted the Icelandic economy. In light of the dramatic effects as well as the efforts put into