Capital Controls and the Resolution of Failed Cross-Border Banks: The Case of Iceland

24 Pages Posted: 28 Oct 2013

See all articles by Fridrik M. Baldursson

Fridrik M. Baldursson

Reykjavik University

Richard Portes

London Business School - Department of Economics; Centre for Economic Policy Research (CEPR); National Bureau of Economic Research (NBER)

Date Written: October 2013

Abstract

We examine Iceland's capital controls, which were imposed in October 2008 in order to prevent massive capital flight and a complete collapse of the exchange rate. The controls have not been lifted yet, primarily because of the risk of outflows of domestic holdings of the failed cross-border Icelandic banks. A substantial restructuring of domestic holdings of foreign creditors of the old banks is required before capital controls can be lifted. We argue that even if the controls are damaging, the gains from lifting them are likely to be much lower than the costs associated with a potential currency crisis following a premature liberalisation of capital outflows. The case of Iceland illustrates the difficulty of resolving large cross-border banks situated in a small currency area.

Keywords: capital controls, cross-border banking, Icelandic banks, resolution of failed banks

JEL Classification: E58, F31, G21

Suggested Citation

Baldursson, Fridrik M. and Portes, Richard, Capital Controls and the Resolution of Failed Cross-Border Banks: The Case of Iceland (October 2013). CEPR Discussion Paper No. DP9706, Available at SSRN: https://ssrn.com/abstract=2346243

Fridrik M. Baldursson (Contact Author)

Reykjavik University ( email )

Ofanleiti 2
Reykjavik, 103
Iceland
+3545996200 (Phone)

Richard Portes

London Business School - Department of Economics ( email )

Regent's Park
London, NW1 4SA
United Kingdom
+44 20 7000 8424 (Phone)
+44 20 7000 8401 (Fax)

HOME PAGE: http://faculty.london.edu/rportes/

Centre for Economic Policy Research (CEPR)

London
United Kingdom

National Bureau of Economic Research (NBER)

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Cambridge, MA 02138
United States

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