Study On The Financial Crisis In Iceland Finance Essay

A fiscal crisis has happened in Iceland which caused an economical recession in one of the smallest states in Western Europe. A failure in three of the biggest Bankss in the state Glitnir, Landsbanki, and Kaupthing lead to economical crisis. The banking sector of the state was nationalized and integrated into a individual operation unit bank which was called Islandbank. The authorities determination had taken when the foreign debts in Icelandic Bankss reached more than 5 billion lbs. Although one of the Bankss had 40 subdivisions in many different states in the universe, all of them are controlled by Financial Supervisory Authority.

The nationalizing of the three Bankss was decided after the three Bankss could non refinance the net incomes of the accrued foreign debts which were exceeded 50 billion lbs and the sedimentation insurance was highly high. The cardinal bank reduced the minimal militias demand, and besides it held high involvement rates every bit good as increased the money supply to the market which lead to a high per centum of rising prices, and the existent value of the krona was overestimated, that caused for international creditors to mistrust the three Icelandic Bankss. so the cardinal bank could non refund the Bankss because its modesty was less than international debt which was 350.3 billion.

The impact of the crisis has caused many different jobs non merely inside Iceland but it ‘s extended to beyond the state ‘s boundary lines. The major internal impact was increasing in unemployment rate, which was consequence of incorporating the three Bankss together and minimising their international operations. The other internal sector affected was imports, because the authorities restricted the traffics with foreign currencies which were an indispensable portion for merchandising the of import merchandises and points.


The crisis was excessively heavy to hit a little state such as Iceland, the crisis impact will be long term, and the recovery procedure will take long clip. We think the recovery can non be done without the authorities, so the first of import action was to suspend the international operations that dealt with Icelandic Bankss, although it caused rising prices, it took portion in minimising the crisis impact. In order to work out the rising prices job the cardinal bank should diminish the involvement rate and that will promote the families and companies to lodge more money.

Strengthening the liquidness is another of import factor and this can be done by recapitalizing the Bankss, by pulling every bit much depositors to supply financess and capitals. Iceland can utilize the national resources to pull investors and particularly in the fishing industry, and pulling many tourers for sing the state. Besides accommodating the korona as the lone currency inside Iceland, and utilize it for international trading such as pricing the exports of Iceland with korona, and that will stabilise the value of korona.

The authorities must hold entree to adequate sum of liquid assets to run into any imaginable salvation demand from depositors or to recapitalize Bankss that are insolvent every bit good as illiquid. The national Bankss have to designate the liability such as sedimentations in to the national currency. The cardinal bank has a potentially limitless supply of domestic currency liquidness through its ability to publish legal stamp at will.

They besides must take a audacious stairss against increasing of the rising prices, so the easy can countervail the unfastened market operations, and selling the securities whether they are public securities or private. If the securities are private, the authorities loses the principal and involvement it would otherwise hold received. So if the securities sold are authorities debts, so the authorities will refund the principal and involvement to the private sector.

The revenue enhancements are really of import and the authorities to get the better of rising prices job and they should increase the revenue enhancements in order to minimise the disbursement, so the revenue enhancement remunerators in Iceland must recognize the importance of paying the revenue enhancements which can assist in forestalling rising prices.

It ‘s obvious that cardinal bank of Iceland must borrow an excess foreign exchange. The best method for the cardinal bank is to try to set up foreign currency recognition lines, and besides set uping overdraft installations which was conducted in the three Nordic Bankss. The barter is a common traffics and agreements conducted by the cardinal Bankss in all around the universe.

In December 2007 the Fed and SNB agreed to trade $ 4 million barter installation, and besides a $ 20 billion barter installation between Fed and the ECB, so if we see Iceland did non took an advantage for barters, because few foreign cardinal Bankss would of course wish to take a important long place in the Icelandic kr & A ; oacute ; na. However, the job of the planetary contagious disease radioactive dust from an Icelandic bank failure is likely to be rather Persuasive and the ECB, the Bank of England and the Fed may be willing counterparties.

However the authorities of Iceland faced some troubles in borrowing money from foreign states, and that is due to the recognition evaluation of Iceland after the crisis.

So we will reason our recommendation by stressing on four major points, the first 1 is that fiscal supervising must be more effectual if it was consolidated inside cardinal bank of Iceland, so it ‘s good ground to hold prudential supervising in cardinal bank.

Second the cardinal bank of Iceland should alter graduated table that it uses for its rising prices mark to minimise the influence of lodging monetary value fluctuation, so that means CB should aim on rising prices steps that are largely comprised of monetary values that are gluey, and so exclude plus monetary values such as lodging.

Third Iceland ‘s commercial Bankss should be encouraged and should besides see that it is in their best involvement to demo more information about their activities. That will increase the assurance among the persons and clients and bad rumours will be eliminated.

Finally the authorities should implement a formal financial policy regulation in order to stifle the Icelandic concern rhythm to back up pecuniary policy better.

Finally the authorities must use the financial policy to cut down the rhythm of Icelandic concern to efficaciously back up the policy of pecuniary.