Bank boom bust in Iceland

Government and regulators in Iceland allowed the country’s banks to grow too big, too fast, paving the way for a financial meltdown, according to an official inquiry.

The Special Investigation Commission  released its report earlier this week. In more than 2,000 pages it paints a picture of reckless expansion in Iceland’s  financial sector. It states that Iceland’s three main banks grew 20-fold in just seven years, a pace that “was not compatible with long-term interests of a strong bank”.

The report heavily criticises regulators and government, accusing them of “extreme negligence”, reports the Financial Times , while regulators were “in general understaffed and lacked experience”, adds the BBC .

But it also contains more than a suggestion of wrongdoing in the banks themselves: “According to all the loan-books from the banks, all the former owners of the three banks had inappropriate loans from the banks,” Sigridur Benediktsdottir, a member of the commission, told the FT.

Iceland wasn’t the only country whose financial sector ran into trouble. Many have wondered if the banks were “unlucky” – could they have avoided collapse if the financial crisis hadn’t hit? The report says no. In a “post mortem” annex , Mark Flannery of the University of Florida comments that the “sub-prime financial crisis surely added pressure on the banks … However, the banks had ignored repeated warnings that their size and rapid expansion exposed them to great risks. It seems likely that they would have come to grief eventually, even without a worldwide financial crisis.”

Useful links

Iceland  at the OECD

OECD Economic Survey of Iceland

Iceland notes from the OECD Economic Outlook (2009)

OECD Insights: From Crisis to Recovery