Iceland's Financial Collapse: A Global Credit Bust

Open Access
Author:
Altus, Ryan B
Area of Honors:
Finance
Degree:
Bachelor of Science
Document Type:
Thesis
Thesis Supervisors:
  • James Alan Miles, Thesis Supervisor
  • James Alan Miles, Honors Advisor
  • Louis Gattis Jr., Faculty Reader
Keywords:
  • Iceland
  • banks
  • US housing bubble
  • leverage
  • Glitnir
  • Kaupthing
  • Landsbanki
  • financial collapse
  • financial crisis of 2008
Abstract:
This thesis provides a thorough analysis of events leading to the 2008 collapse of Iceland’s financial system. The exploration begins by examining the US housing bubble of the 2000s. Overvalued housing assets, subprime mortgages, and inappropriately rated mortgage-backed derivatives contributed to the onset of the global financial crisis. As Americans defaulted on their loans, banks and other financial institutions across the globe who invested in the US housing market suffered, including Fannie Mae, Freddie Mac, and Lehman Brothers. Following the Lehman collapse, banks grew increasingly risk averse and stopped providing each other with short-term loans. Soon thereafter, the global short-term credit market vanished. During this same time period, Iceland’s financial sector grew to be quite powerful. Its highly levered banks feverishly pursued many risky investment projects. Three major banks controlled close to 90 percent of the nation’s financial assets and possessed balance sheets valued at over 10 times the country’s GDP. To reach these levels, these three banks maximized funding through cheap foreign debt and short-term loans. When the short-term credit market dried up, the Icelandic banks could not continue operations and eventually collapsed, bringing down the entire economy. This thesis argues that nine distinct factors contributed to the collapse of the Icelandic financial sector. Additionally, this thesis provides speculation as to how the Icelandic economy will recover.