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Small states and big banks – the case of Iceland

Author

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  • Hilmar Þór Hilmarsson

    (School of Business and Science, University of Akureyri)

Abstract

The Icelandic economy was hit hard by the global economic and financial crisis that started in the fall of 2008. During this crisis the three largest banks all collapsed and many other smaller banks and companies went bankrupt in the aftermath of the crisis with severe consequences for the economy and the people. Prior to the crisis, Iceland, a high income economy, had experienced strong growth rates and unprecedented expansion in overseas investment and activities, especially in the financial sector. This article focuses on action by top government officials during this expansion as well as during and after the collapse of the Icelandic banks. The findings of the study are that the government showed negligence and made mistakes by not taking credible action to manage risks following a rapid cross border expansion of the Icelandic banking system. This had severe consequences and resulted in the collapse of the Icelandic economy in October 2008. The discussion can have a wider relevance than that for Iceland only. This is especially true for small countries with a large banking sector, using their own currency, and with limited fiscal space to support their banks during a crisis.

Suggested Citation

  • Hilmar Þór Hilmarsson, 2013. "Small states and big banks – the case of Iceland," Baltic Journal of Economics, Baltic International Centre for Economic Policy Studies, vol. 13(1), pages 31-48, July.
    • Handle: RePEc:bic:journl:v:13:y:2013:i:1:p:31-48
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    File URL: https://www.tandfonline.com/doi/epdf/10.1080/1406099X.2013.10840524
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    Citations

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    Cited by:

    1. Hilmar Tór HILMARSSON, 2016. "Iceland, economic integration and the European Union," REVISTA DE MANAGEMENT COMPARAT INTERNATIONAL/REVIEW OF INTERNATIONAL COMPARATIVE MANAGEMENT, Faculty of Management, Academy of Economic Studies, Bucharest, Romania, vol. 17(4), pages 373-391, October.
    2. Hilmar Tór HILMARSSON, 2014. "Managing Financial Crisis: The Case of Iceland and Latvia," REVISTA DE MANAGEMENT COMPARAT INTERNATIONAL/REVIEW OF INTERNATIONAL COMPARATIVE MANAGEMENT, Faculty of Management, Academy of Economic Studies, Bucharest, Romania, vol. 15(2), pages 200-214, May.
    3. Hilmar Tór HILMARSSON, 2014. "Managing the Crisis in Iceland and the Dishonesty of the International Community?," REVISTA DE MANAGEMENT COMPARAT INTERNATIONAL/REVIEW OF INTERNATIONAL COMPARATIVE MANAGEMENT, Faculty of Management, Academy of Economic Studies, Bucharest, Romania, vol. 15(5), pages 601-612, December.

    More about this item

    Keywords

    Economic and financial crisis; economic policy; international expansion of firms; risk management;
    All these keywords.

    JEL classification:

    • F21 - International Economics - - International Factor Movements and International Business - - - International Investment; Long-Term Capital Movements
    • G32 - Financial Economics - - Corporate Finance and Governance - - - Financing Policy; Financial Risk and Risk Management; Capital and Ownership Structure; Value of Firms; Goodwill
    • H12 - Public Economics - - Structure and Scope of Government - - - Crisis Management

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