The Reincarnation of Iceland’s Banks

When Iceland's authorities seized the country's three main banks in October 2008, they struggled at first to keep things running. Despite all the difficulties and panic, banks kept on functioning. And within two weeks, the government announced it was setting up new banks with clean balance sheets, leaving the troubled assets and losses with the old banks. The panic about Iceland's banks started at the same time as Ireland's lenders. After Lehman Brothers' bankruptcy on September 15, both countries' banks ran into funding problems. On September 29, when the Irish government decided to guarantee all its banks' liabilities, Iceland decided to buy a 75 percent stake in the country's third biggest lender. However, when troubles spread to the other two banks, Iceland went exactly in the opposite direction of its oceanic neighbor southeast. The government pushed through parliament an emergency law that gave it powers to seize the banks, re‐structure them, and guarantee only domestic deposits. So while one island's banks were kept alive as zombies for two more years before they brought down the whole country with them, the neighboring island's troubled banks were allowed to die. This chapter discusses the reincarnation of Iceland's banks that emerged quickly as smaller, more focused and cleaned‐up versions of their former selves to support Iceland's economic recovery.