Iceland’s Secret: First-hand account of 2008 financial crisis delivers important lessons

Iceland as a cautionary tale

Iceland was the nation most badly affected by the financial crisis in 2008. Within one week in late 2008, its three largest banks collapsed. In a recent episode of my Economics Explored podcast, Jared Bibler, the author of Iceland’s Secret, explains that the crash resulted from the rapid growth of banks that were previously small, sleepy institutions. 

Originally, Icelandic banks, such as the Agricultural Bank, were of scale you would expect for a national population of only 250,000 in the 1990s. However, in the 2000s, they grew exponentially, doubling in size every few years, each eventually becoming comparable to Enron–the failed US$63 billion energy giant that was the US’s biggest-ever bankruptcy in the early 2000s (Figure 1). Then the crash came, in the weeks following the collapse of Wall St giant Lehman Brothers in September 2008. Icelandic banks had expanded to unsustainable levels, and their precariousness became apparent to all as the global financial crisis set in. 

Chart showing how Icelandic bank assets skyrocketed in the 2000s before crashing in 2008.

As Jared told me during our conversation, the unemployment rate in Iceland skyrocketed during this time (Figure 2). The collapse of the commercial banks resulted in the loss of thousands of jobs. The banks had employed a significant portion of the population, and their downfall had a ripple effect throughout the economy. 

Chart showing the surge in the unemployment rate during Iceland's 2008-10 financial crisis

As a result of the crisis, the UK froze payments to Iceland, treating the country as a terrorist organisation. This severely affected Iceland, as food imports from the UK were halted, and the economy suffered. The podcast episode highlights how the freeze in payments drastically affected the daily lives of Icelanders. They had to rely on locally grown food and cut back on expenses as the buying power of their salaries decreased significantly. The government also raised taxes, further burdening the population.

Jared’s book Iceland’s Secret is subtitled “The Untold Story of the World’s Biggest Con.” Before the crisis, Jared had worked for one of the banks that collapsed, and later he worked at the financial markets regulator. His work contributed to the successful prosecution of several bank officials. In my conversation with him, Jared shed light on the fraudulent practices within the Icelandic banking industry and the subsequent collapse of the country’s financial sector. The Icelandic banks’ manipulation of their stock prices–secretly buying shares in themselves–was terrible and illegal behaviour. The banks deceived the entire country and the investing world. Jared exposed the lack of ethical conduct within these banks, and the dismissive attitude towards warnings and concerns raised by employees. The Icelandic episode is a cautionary tale, emphasising the importance of transparency, ethical behaviour, and responsible decision-making in the financial industry. It also highlights the devastating consequences that can occur when these principles are disregarded.

What does this all mean for Australia? 

Jared and I discussed the significance of this story beyond Iceland. In Jared’s view, the forces and incentives that led to the collapse of the Icelandic banks are present in many financial markets worldwide. The lack of sufficient structures and incentives to prevent such collapses is a cause for concern. Arguably, all our financial regulators need to be better incentivised to uncover risky financial practices by banks–e.g. through financial rewards linked to the scale of the dire financial practices uncovered. 

Jared’s book reminds us to be vigilant regarding financial shenanigans. In Australia, that is the job of the Australian Prudential Regulation Authority (APRA). Hopefully, APRA is doing a better job of supervising financial institutions after the Banking Royal Commission of 2017 to 2019 and a subsequent independent review of APRA that was highly critical of the organisation. APRA had failed to detect and prevent the wrongdoing that prompted the Royal Commission. But, hopefully, it has learned its lesson and is much more vigilant now.

Thankfully, the Reserve Bank of Australia (RBA) considers Australian banks in good shape, even considering the current economic slowdown. We have not had the crazily high growth in bank assets (e.g. home loan mortgages) that occurred in Iceland in the 2000s (Figure 3). The RBA’s October 2023 Financial Stability Review concluded, “Banks are well positioned for a turn in the credit cycle. They are well capitalised, profitable and have raised provisions, putting them in a strong position to weather an increase in loan arrears.” So we don’t need to worry about an Iceland-type meltdown anytime soon in Australia. Still, given what has happened overseas and domestically to a lesser extent historically, we should remain vigilant. 

Chart showing how Australian bank assets have been growing, but not an obviously crazily high rate that bank assets did in Iceland.

Iceland’s Secret is highly recommended

In conclusion, I recommend Jared’s book Iceland’s Secret if you want a good read this Christmas holiday. It is well-researched, well-written, and contains fascinating details about how bad things got in Iceland and the financial risks we should look out for here.  

This article was authored by Adept Economics Director Gene Tunny and published on 14 December 2023. For further information, don’t hesitate to contact us via or 1300 169 870.

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