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Iceland: You win some, you learn some

Earlier this year Iceland’s Supreme Court convicted four former executives of the failed Kaupthing bank, including its former chief executive and chairman. Icelandic media called it the biggest crackdown for financial fraud in the nation’s history. Investigations were led by the Icelandic government, which appointed a prosecutor whose sole job was to wade through the banks’ staggering debts and poor governance and figure out what these bankers had been up to.

The special prosecutor, Olafur Hauksson, may not be popular with the bankers, but he certainly is with politicians, and has since issued a public statement encouraging other countries to pursue similar tactics against wrongdoers.

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The conviction of the four Kaupthing executives was a particularly successful example, and not all investigations into other bankers have gone as smoothly. Often this was because, not only did the Icelandic people not understand what was going on behind the scenes of the sudden boom, neither did the bankers.

Iceland’s efforts have been in direct contrast to those of many western authorities where few executives have been investigated, let alone tried and fined. This can feel distinctly unfair to those in many developed countries who are still feeling this effects of austerity measures put in place to bring national finances back in line.

Open for business…No, really

Nothing creates panic like telling people they cannot access their money, and despite all three major Icelandic banks failing in less than a week, none of them immediately closed their business. Instead, capital controls were put in place to limit outflows of cash from Iceland. Not only did this prevent the banks from immediately losing all liquidity, but acted as a happy medium between the two extremes of full capital flight and complete shut down. Overhanging debts were also written down, helping bring the stagnant economy back to life.

Limits were also put on the ability for bank deposits to be converted into hard currency. When each bank failed, a new bank took its place. This was done by moving all critical assets and liabilities into the new, better capitalised bank, but in the process ensured that more assets than liabilities made the transfer.

Jon Steinsson, who was an adviser to the prime minister of Iceland in 2008 and is currently an associate professor of economics at Columbia University in New York, upheld the decision to keep the banks open and encouraged other developed nations, particularly Greece, to impose similar capital controls and restrictions on the convertibility of deposits into currency in times of crisis.