Such a turn of events would have had severe effects on the real economy. In this respect, it is important to refrain from drawing too-sweeping conclusions from the banking collapse in Iceland, as the international part of Iceland’s banking system was so large and domestic banking operations were actually kept up and running at considerable cost. International cooperation on crisis management grew markedly in scope, particularly through collaboration among the G20 countries and at the International Monetary Fund. It encompassed a common perspective on fiscal measures to support the banking system and stimulate demand, and the provision of support to specific countries. Later on, emphasis shifted to the reform of the financial regulatory framework. That work is still underway. BIS central bankers’ speeches  1  But in spite of these measures, by late 2008 and early 2009 the recession on both sides of the Atlantic had become the deepest since the interwar years, and on a global level it was the most extensive and synchronised contraction in history. All of this affected the Icelandic economy, of course, but added to it were the collapse of Iceland’s banks, the plunge in asset prices, and the inevitable adjustment of domestic demand following the overheating in 2005–2007 – an adjustment that had begun before the banks fell. The contraction from the peak in Q4/2007 to the trough in Q1/2010 was the deepest Iceland has seen, at least in the post-war period. GDP contracted by nearly 12½%.
Már Guðmundsson: Recent economic and financial developments in Iceland Speech by Mr Már Guðmundsson, Governor of the Central Bank of Iceland, at the 53rd Annual General Meeting of the Central Bank of Iceland, Reykjavík, 27 March 2014. *  *  *  Mr. President, Prime Minister, Minister of Finance and Economic Affairs, Chairman of the Supervisory Board, former Governors, Directors, Ambassadors, Ladies and Gentlemen: This Annual General Meeting is the Bank’s sixth one since a large part of the Icelandic financial system collapsed, ushering in the deepest economic contraction Iceland has seen since measurements began after World War II. It is also the last Annual General Meeting in my current term as Governor. For this reason, and because we stand at a turning point in the resurrection of Iceland’s economy and financial system, it is appropriate to look back, assess the progress made, and identify the challenges ahead. Iceland’s financial crisis was part of the global crisis that peaked in September 2008, when the US investment bank Lehman Brothers failed, triggering a worldwide run on banks’ foreign funding. Had it not been for the coordinated response by leading central banks around the world, which provided collateralised US dollar liquidity to international banks, both directly and through foreign currency swaps, many of those banks would have gone under. Iceland was a participant in this cooperative effort only to a very limited degree. But its commercial banks were highly dependent on foreign funding, which was much shorter-term than the foreign assets in which they had invested.