Alistair Darling and the Icelandic Bank Collapse

factors. The SIC traced the collapse to the rapid credit expansion of the three main banks—Kaupthing, Landsbanki and Glitnir—in the preceding few years. The SIC also found that systemic risks in the Icelandic banking sector had been seriously underestimated, not least because three business groups virtually controlling the banks had obscured their real obligations under a veil of shell companies and fictitious dealings. (Hreinsson, Benediktsdottir & Gunnarsson, 2010, p. 14). While the governors of the Central Bank of Iceland, CBI, had repeatedly warned the government against the banks ’ rapid credit expansion (Hreinsson et al. 2010, 21, pp. 63, 69, 73), both they and leading government ministers must have realized that their options were limited. The banks were reluctant to sell assets when prices were low, and the authorities had no legal means at their disposal to force the banks to do so. Thus, the CBI and the government took the only course open to them at the time: to try to ride out the storm, stating publicly that the banks were solvent and trying quietly to obtain access to foreign currency. However, in the strained circumstances of 2008, very few foreign central banks wanted to make currency swap deals with the CBI. A