Chapter 11: Post-Crisis Regulation and Supervision of Icelandic Banks

Abstract

Abstract Since the financial crisis of 2008, legislation and rules affecting the financial market in Iceland have been strengthened considerably. Tougher capital requirements, detailed and frequent reporting, more thorough fit-and-proper tests, barriers to connected lending and strict limits on bonus payments are but a few examples. Similarly, the supervision of banks has been upgraded markedly. It is now much more intrusive and forward-looking than before, that is, it is more focused on governance and the business model. Many of these reforms are based on international initiatives, such as the Basel III standard, while others are particular to Iceland. The main objective of these reforms is to strengthen the resilience of the banking sector and limit the negative effects on consumers of harmful enterprise incentives. Trust in the financial system collapsed as a consequence of the crisis but is recovering only slowly. This apparent lack of confidence is reflected only to a limited extent in firms’ and households’ willingness to seek banking services. This raises the questions of how to appropriately measure trust, and what factors influence it. Iceland may turn out to be an interesting natural experiment in this respect. It has a unique record of prosecuting and sentencing bankers for offences that are hardly worthy of administrative fines in some other countries – but whether strict accountability is the recipe for rebuilding trust remains to be seen.