Proceedings of the 7th World Conference on Management, Business and Economics
Year: 2025
DOI:
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Iceland’s 2008 Banking Crisis: Structural Failures and the Road to Recovery
Stefan Bjarni Gunnlaugsson
ABSTRACT:
The 2008 banking crisis in Iceland precipitated an unprecedented financial shock in this small, open economy. Triggered by the collapse of all major banks, the crisis was rooted in a convergence of factors including excessive borrowing, high-risk investment strategies, inadequate regulatory oversight, and an overreliance on international capital markets. As global financial turbulence intensified, Iceland’s banking sector experienced acute liquidity constraints, ultimately leading to the inability to meet foreign obligations and the subsequent nationalization of key financial institutions. The macroeconomic consequences were severe, with marked currency depreciation, rapid inflation, GDP contraction, and a significant surge in unemployment. These outcomes underscore the vulnerabilities of an overheated financial sector and highlight the critical importance of robust regulatory frameworks. In response, the Icelandic government implemented a comprehensive set of stabilization measures aimed at restoring financial equilibrium and investor confidence. Central to these efforts were fiscal discipline, structural reforms, and the imposition of capital controls to stabilize the exchange rate. Additionally, a robust expansion in the tourism sector provided a vital boost to economic recovery. Furthermore, Iceland’s successful negotiation of settlements with foreign creditors—facilitated by effective legal frameworks and constructive dialogue—secured essential financial resources that underpinned the stabilization process. This study offers a detailed analysis of the crisis dynamics and policy responses, providing valuable insights into the management of financial crises in small, open economies.
keywords: Banking Crisis, Iceland, Economic Recovery, Financial stability