As global credit markets tightened, Glitnir—one of Iceland’s three major banks—faced a rapid funding squeeze. The government announced it would buy a 75% stake, signaling that the state was stepping in to prevent a broader banking panic.
Iceland’s parliament passed emergency legislation to stabilize the financial system. The law strengthened the Financial Supervisory Authority’s ability to intervene in failing banks, laying the legal groundwork for rapid takeovers and restructuring.
Using its emergency powers, the Financial Supervisory Authority assumed authority over Landsbanki’s board and appointed a receivership committee. The move aimed to keep core domestic banking services running as the bank’s broader operations faltered.
Kaupthing, Iceland’s largest bank, was taken over by the authorities as confidence collapsed across the banking system. With all three major banks now under state control or receivership, Iceland’s oversized cross-border banking model effectively failed.
To maintain basic banking services, authorities set up a “new bank” structure to take over Glitnir’s domestic operations and deposits. This separation helped keep payments and household banking functioning while the old bank’s international parts were wound down.
Iceland opened formal negotiations with the IMF on a stabilization plan after the bank failures disrupted payments and the exchange rate. IMF staff discussions ended on October 23, forming the basis for the later Stand-By Arrangement request and policy package.
The IMF approved a two-year Stand-By Arrangement of SDR 1.4 billion (about US$2.1 billion at the time) to support Iceland’s program. The program focused on stabilizing the exchange rate, rebuilding a viable domestic banking system, and protecting fiscal sustainability.
A package of IMF program documents was released, including the staff report prepared after October discussions and completed in mid-November. Public release helped clarify the policy plan—tight monetary policy, banking restructuring, and capital controls—supporting transparency and expectations.
Following IMF approval, the Central Bank stated that ongoing restrictions on capital movements would continue under a clearer legal basis. Parliament had amended the Foreign Exchange Act to allow temporary controls, intended to prevent destabilizing capital flight while markets were rebuilt.
The Central Bank issued detailed rules restricting cross-border capital movements, while emphasizing that current-account transactions (trade in goods and services) were no longer restricted. These rules became the core legal instrument for Iceland’s crisis-era capital controls.
The Central Bank released guidance aimed at residents and non-residents to explain how the controls worked and why they were being phased rather than lifted all at once. This communication was meant to reduce uncertainty and limit attempts to circumvent the new restrictions.
After multiple reviews and extensions, the IMF Executive Board completed the sixth and final review of Iceland’s program, marking formal completion of the Stand-By Arrangement. By this point, the IMF reported that key objectives—stabilizing the exchange rate, restructuring the financial sector, and putting public finances on a sustainable path—had been met.
Icelandic banking collapse, capital controls, and IMF program (September–November 2008)