Iceland's banking collapse

Following financial deregulation in the 1990s and full privatization of Iceland's major banks in 2003, Kaupthing, Landsbanki and Glitnir expanded rapidly overseas, borrowing cheaply on international wholesale markets to buy foreign banks, retailers and other assets while high domestic interest rates attracted a wave of speculative foreign capital into the krona. By 2008 the three banks' combined balance sheets had grown to roughly ten times the size of Iceland's entire economy, an imbalance that became fatal once global credit markets froze after Lehman Brothers' collapse cut off their wholesale funding. All three banks failed within days of each other, on October 7-9, 2008, the largest systemic banking collapse relative to the size of a national economy in modern history. Iceland became the first Western European country since Britain in 1976 to enter an IMF program, securing $4.6 billion in support, and imposed strict capital controls to stabilize its currency. It also split each failed bank into a domestic entity, protected by the state, and a separate foreign entity left to creditors — an unusual approach that let Iceland recover more quickly than many expected.