Iceland: Fish, Banks and Recovery

How Iceland built wealth from fishing with a quota system, how its banks grew too big and collapsed in 2008, and how it recovered by letting banks fail.

Iceland is a North Atlantic island of about 400,000 people.

Fishing

Fishing built Iceland’s wealth.
Iceland introduced individual transferable quotas (ITQs) in the 1980s-90s, allowing trade in fishing rights and preventing overfishing.

Banking boom

After deregulation, Iceland’s three big banks grew to around 10 times the size of its GDP.
They borrowed heavily abroad.

The 2008 collapse

In October 2008, all three banks collapsed.
The krona fell sharply.
Iceland got an IMF programme and imposed capital controls.

Letting banks fail

Iceland protected domestic depositors but let banks’ foreign creditors bear losses.
Some bankers were prosecuted.

Recovery

Tourism boomed after the 2010 Eyjafjallajökull volcano drew attention.
Iceland recovered and lifted capital controls in 2017.

Lesson

Letting oversized banks fail was painful but helped recovery.

The fishing quota

An Icelandic fisher owns a quota to catch a set tonnage of cod each year, which he can sell or lease, preventing a race to overfish.

Thinking bank failures always need taxpayer bailouts

Iceland let its banks fail and recovered.

Key takeaways

Iceland's wealth came from fishing managed by quotas.
Its banks grew to 10 times GDP and collapsed in 2008.
Iceland let foreign creditors bear losses.
Tourism helped recovery; controls ended in 2017.