All's Well that Ends Well? Resolving Iceland's Failed Banks

28 Pages Posted: 14 Jul 2016

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)

Eirikur Elis Thorlaksson

Reykjavik University

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Date Written: July 13, 2016

Abstract

Iceland’s capital controls 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; until recently this was primarily because of the risk of large outflows of domestic holdings of the failed Icelandic banks. As argued in a precursor to this paper (Baldursson and Portes, 2014), significant restructuring of domestic holdings of foreign creditors of the banks was required before the controls can be lifted. Such a restructuring was finally accomplished in January 2016 and gradual lifting of the capital controls now appears to be within reach. Broadly in line with the recommendations of Baldursson and Portes (2014), the resolution involved a voluntary – in much the same sense as the Greek debt restructuring was voluntary – restructuring of the banks’ debt, under which most of the Icelandic krona assets of the banks were relinquished to the state or tied up in Iceland. Resolution of the old banks will cut Iceland’s public debt, but it will still be substantially higher than before the crisis. The net international investment position of Iceland is, however, stronger than it has been in decades.

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 and Thorlaksson, Eirikur Elis, All's Well that Ends Well? Resolving Iceland's Failed Banks (July 13, 2016). Available at SSRN: https://ssrn.com/abstract=2809211 or http://dx.doi.org/10.2139/ssrn.2809211

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)

1050 Massachusetts Avenue
Cambridge, MA 02138
United States

Eirikur Elis Thorlaksson

Reykjavik University ( email )

Ofanleiti 2
Reykjavik, 103
Iceland

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