“The Fault Lines in Cross-Border Banking: Lessons from the Icelandic Case”. SUERF Studies 05/2010, European Money and Finance Forum (2010). Baldursson and Portes give a recent assessment of the rise and fall of the Icelandic banks: Friðrik M Baldursson and Richard Portes (2013), “Gambling for resurrection in Iceland: the rise and fall of the banks”, CEPR Discussion Paper 9664, September. 5  Fleming and Klagge describe the Federal Reserve’s foreign exchange swap lines: Michael J. Fleming, and Nicholas J. Klagges. “The Federal Reserve’s Foreign Exchange Swap Lines. Federal Reserve Bank of New York: Current Issues in Economics and Finance”, 16, 4 (2010). Allen and Moessner analyse the important role of the US Dollar surplus in the policy response to the crisis and compare it to the policy response during the Great Depression: William A Allen and Richard Moessner (2010), “Options for meeting the demand for international liquidity during financial crises”, BIS Quarterly Review, September 2010, http://www.bis.org/. 2  BIS central bankers’ speeches  of the safety net and the associated moral hazard-mitigating mechanism in cross-border banking applied across the board to regulation, supervision, LOLR, deposit insurance, and crisis management and resolution. The adjustment that needs to take place after the crisis in order to make cross-border banking safer is clear in principle: the market action and the public framework in the form of the safety net and other arrangements has to be better aligned.
In essence, the adopted solution saved the domestic operations of the banking system by creating new banks, which was done by carving a big part of the domestic assets and liabilities out of the old, failing banks. The new banking system amounted to 1.7 times GDP. The rest – and much bigger part – went into a resolution process, where it largely remains, pending a solution that would make it possible for Iceland to lift its comprehensive controls on capital outflows, but that is another story. In order to reverse the ongoing run on domestic deposits, a declaration was made that all deposits in Iceland were safe and all deposits in Icelandic-headquartered banks were given priority over other unsecured claims. This distinction made between domestic deposits and foreign currency deposits in the banks’ foreign branches added fuel to the fire of the socalled Icesave dispute about the settlement of deposit guarantees in the Dutch and British branches of one of the banks. But guaranteeing those deposits would never have been credible and might have bankrupted the Government had it been attempted. The deposits in question were in foreign currencies and amounted to 11½ billion euros – far in excess of Iceland’s FX reserves, which amounted to 2½ billion euros. And the sovereign was completely closed off from foreign capital markets at that point.