Iceland’s government announced a plan to take a 75% stake in Glitnir, one of the country’s major banks. The move was meant to prevent a sudden failure, but it also signaled that the banking system was under severe pressure and losing access to funding.
Parliament passed emergency legislation to stabilize the financial system, giving authorities stronger tools to intervene in failing banks. This legal shift helped set the stage for rapid takeovers and restructuring as the crisis accelerated.
Iceland’s Financial Supervisory Authority took control of Landsbanki as the bank could no longer operate normally. A “new bank” structure was used to keep domestic banking services running while the failed institution entered resolution.
Authorities took control of Kaupthing, the largest Icelandic bank, as the crisis spread across the entire banking system. With multiple major banks failing within days, Iceland faced a combined banking collapse that it could not finance as a normal bailout.
The IMF Executive Board approved a two-year Stand-By Arrangement for Iceland to support a stabilization program. The program’s goals included restoring confidence, stabilizing the exchange rate, and rebuilding a viable domestic banking system.
Iceland adopted formal rules restricting cross-border capital movement, while allowing current-account payments (trade in goods and services) to continue. These controls aimed to prevent a rapid exit of funds that could destabilize the króna and exhaust foreign reserves.
The Central Bank of Iceland published questions-and-answers to explain how the new foreign exchange rules would work in practice. The guidance emphasized that capital controls were intended to be temporary and lifted in stages once the króna and financial system stabilized.
The IMF reported that staff and Iceland’s government had reached agreement on policies for the first program review, after delays from the original schedule. The statement highlighted that Iceland had clarified plans for fiscal consolidation and capital control liberalization alongside bank restructuring.
The Central Bank and government introduced a strategy for phased removal of capital controls. The plan laid out how liberalization would proceed step-by-step, reflecting concerns that lifting controls too quickly could trigger renewed pressure on the króna.
Iceland implemented an initial relaxation: foreign currency inflows for new investments were permitted, and investors could later convert and repatriate proceeds from those post-November 1, 2009 investments. At the same time, the rules were tightened in other areas to close loopholes and improve enforcement.
As Iceland continued restructuring, the separation between “old” failed bank estates and “new” domestic banks was finalized toward the end of 2010. Policymakers concluded that this split created major balance-of-payments risks—meaning a large potential foreign-currency outflow if creditors were paid out too quickly—reinforcing the case for keeping controls in place.
Authorities moved from crisis containment toward a longer-run exit plan by publishing a revised capital account liberalisation strategy in 2011. The updated approach focused on reducing “offshore króna” holdings (foreign-owned króna assets) in a controlled way, reflecting how capital controls had become central to Iceland’s post-crisis monetary and financial stability framework.
Iceland: Krona Float, Banking Collapse, and Capital Controls (2008-2011)