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Northern lights, breathtaking landscapes and a surprisingly temperate climate have made Iceland one of the modern wonders of the world. Perhaps what has made Iceland even more intriguing is its role in prosecuting more than two-dozen bankers for their role in the 2008 financial crisis – something unheard of in the United States or any other advanced industrialized nation.

Iceland: A Background

With a population of just 329,100 spread across an area of 103,000 square kilometres1, Iceland has sparked the imagination of people all over the world. That’s why close to a million tourists made their way to the country in 2014, an increase of nearly 24% over the past year. In fact, tourism in Iceland has increased at a double-digit rate each year since 20102.

Like other advanced industrialized countries, Iceland experienced a protracted economic slowdown in the aftermath of the 2008 subprime mortgage crisis. Iceland’s 2008-11 financial crisis saw all three of the country’s major privately-owned commercial banks default after failing to refinance their short-term debt. Given the small size of the Icelandic economy, the banking collapse was considered the largest in history3.

To say that Iceland entered into recession following the 2008 financial crisis would be an understatement. It was a full-blown depression. The country’s stock market plunged 90%, unemployment surged ninefold and inflation spiked to 18%4.

After contracting for the better part of two years, Iceland’s gross domestic product (GDP) has rebounded strongly since 20115. Unemployment has declined by nearly half and the debt-to-GDP ratio has fallen to management levels6. In 2015 the country’s finance minister announced a 39% tax on investors looking to take their money out of Icelandic banks in an effort to curb capital flight from the country just six years after imposing stringent bank laws7.

Rampant Deregulation

The rampant deregulation of Iceland’s banking system in 2001 was, in retrospect, a huge misstep. While it further bolstered Iceland’s reputation as a global financial centre, the country’s banks simply took on too much liability with insufficient equity to back it up. As the financial system began to collapse, Icelandic authorities realized that the banks had become “too big to save” (after all, the banks’ liabilities were more than 20 times bigger than Iceland’s national budget). As the banks were allowed to fail, so too was the currency. Within a few months, over 60% of bank assets were written off8.

The government made several bold decisions during the crisis in order to reform the financial system. According to Gudrun Johnsen, Assistant Professor of Finance at the University of Iceland,

“After the crash, the government cleaned house in all the three banks, establishing new boards and management. Banks in Iceland are well capitalised with high equity levels and financial supervision has been strengthened immensely.”9

Courts Target Bankers for Fraud, Market Manipulation, Embezzlement

What made Iceland’s recovery so remarkable was its insistence on going against the grain. Not only did Iceland allow its three largest banks to go bust (instead of bailing them out), it also allowed the bankers responsible for the crisis to be prosecuted as criminals – something unheard of in the United States and Europe.

Since the fallout of the financial crisis, a total of 26 CEOs and high-level banking executives have been sentenced to a combined 74 years in prison, with the majority of those convicted getting between two and five years behind bars.

According to Iceland Magazine, in 2015 the country’s Supreme Court and the Reykjavik District Court

“sentenced three top managers of Landsbankinn and two top managers of Kaupþing, along with one prominent investor, to prison for crimes committed in the lead-up to the financial collapse of 2008.”

The Magazine added that, “With these rulings the number of bankers and financiers who have been sentenced to prison for crimes relating to the financial collapse has reached 26, and a combined time of 74 years.”10

Former managers of Kaupþing Bank, one of Iceland’s major financial institutions that was taken over by the government during the financial crisis, topped the list of financial executives to be prosecuted. A total of 11 former bankers at Kaupþing were sentenced on crimes of market manipulation, embezzlement and breaking fiduciary duties11.

Why Everyone (Except the Bankers) Love Iceland

Iceland’s handling of the financial crisis demonstrated that there’s more to love about the country than its natural beauty. While governments in the United Kingdom and United States were using taxpayer money to bail out financial institutions after they practically destroyed the economy, Icelanders effectively took control of their government and demonstrated that there’s no such thing as too big to fail (as we mentioned earlier, Iceland’s financial system was way too big to save). As a result, Iceland became the first European country to exceed its pre-crisis peak in terms of economic output12.

Seven years after the fallout of the financial crisis, nations are still struggling to regain their footing. This time, however, it’s unclear whether the global economy could handle a disaster similar to the one we experienced in 2008. This makes Iceland an important example of a country that may just have got it totally right.

 


  1. Government of Iceland. The Big Picture.
  2. Icelandic Tourist Board. Tourism in Iceland in Figures April 2015.
  3. The Economist (December 11, 2008). Cracks in the crust. The Economist.
  4. Editors (September 26, 2012). “Fighting Recession the Icelandic Way.” Bloomberg View.
  5. The World Bank. Iceland GDP growth (annual %).
  6. Hazel Sheffield (June 10, 2015). “Three charts that show Iceland’s economy recovered after it imprisoned bankers and let banks go bust – instead of bailing them out.” The Independent.
  7. World Finance. Failing banks, winning economy: the truth about Iceland’s recovery.
  8. World Finance. Failing banks, winning economy: the truth about Iceland’s recovery.
  9. World Finance. Failing banks, winning economy: the truth about Iceland’s recovery.
  10. Free Thought Project (October 21, 2015). “Iceland does what the US won’t: 26 top bankers sentenced to prison for role in financial crisis.” Raw Story.
  11. Staff. “26 bankers already sentenced to a combined 74 years in prison.” Iceland Magazine.
  12. Hazel Sheffield (June 10, 2015). “Three charts that show Iceland’s economy recovered after it imprisoned bankers and let banks go bust – instead of bailing them out.” The Independent.

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