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Why Ireland should look to Iceland for advice

Jumpboard

Iceland should be the example looked upon by Ireland as to what a strong, independent, and wiser country does in a banking crisis.

You do not need to burden the people with the debt of what is after all a private company. Propping up (bailing out) such large scale failures is a waste of resources and would be much better spent on tackling debt.

So what happens if you let the banks fail? Take a look

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dlouth15

Jumpboard wrote: »

You're getting over printed ECB money
Or quantative easing if you like, a shoddy system indeed.

However, in Iceland's case, the mere existence of a central bank helped prevent a run. The population, knowing that the central bank was ready to restock the ATMs if necessary, did not feel the need to withdraw all their money. Though a few did withdraw money,. there was never a danger of a full scale run on the banks.

noodler

OP, I really think you should do a little more research on not only Iceland's crash but also Ireland's.

Some of your posts appear to be factually incorrect and/or vague to the point of being meaningless.

Scofflaw

dlouth15 wrote: »

However, in Iceland's case, the mere existence of a central bank helped prevent a run. The population, knowing that the central bank was ready to restock the ATMs if necessary, did not feel the need to withdraw all their money. Though a few did withdraw money,. there was never a danger of a full scale run on the banks.

The immediate imposition of capital controls, together with the fact that the entire Icelandic banking system was nationalised overnight, leaving nowhere for the money to go, may have played a small part.

cordially,
Scofflaw

dlouth15

Scofflaw wrote: »

The immediate imposition of capital controls, together with the fact that the entire Icelandic banking system was nationalised overnight, leaving nowhere for the money to go, may have played a small part.

cordially,
Scofflaw

Hmmm. Well you can implement capital controls to prevent money leaving the country that would not necessarily prevent a bank run where people are worried that the ATMs will run dry and they won't have enough for groceries though it might alleviate the situation a bit. Really you need a central bank standing by to provide liquidity if necessary as far as I can see. You can stop or hinder money leaving the country but capital controls won't stop queues at the ATMs with people looking to hoard cash.

I'm not an economist but here's an extract of an article from two Icelandic ones.

Immediately following the crisis, the foreign part of the payment system collapsed, and the exchange rate fell by around 25%. Funds held by carry traders amounted to over 40% of GDP, and it was feared that the bulk of those investors, along with some domestic agents, would seek to leave the Icelandic currency, exaggerating the fall in the exchange rate.
Under these circumstances, the government had three choices.
Let the currency markets determine the exchange rate and face the consequences;

manage exchange rates by imposing special taxes on speculative capital movements; or

impose capital controls.

Neither the Icelandic policymakers nor the IMF found the first choice palatable.
The Icelandic authorities seem to have been in favour of the second choice but reportedly the IMF, arguing in terms of equal treatment of all foreign currency transactions, demanded strict capital controls. So, at the IMF’s insistence, all-encompassing capital controls applying both to inflows and outflows of currency were introduced.

Note that these economists see capital controls of the sort imposed on Iceland as unnessary:

Thus, in our view, the imposition of capital controls was both unnecessary and unjustified. Without them, the exchange rate might have temporarily fallen even further in a worst case scenario, in which case a surgical intervention in the form of a temporary tax on short capital outflows would have been a sufficient policy response.

Scofflaw

dlouth15 wrote: »

Hmmm. Well you can implement capital controls to prevent money leaving the country that would not necessarily prevent a bank run where people are worried that the ATMs will run dry and they won't have enough for groceries though it might alleviate the situation a bit. Really you need a central bank standing by to provide liquidity if necessary as far as I can see. You can stop or hinder money leaving the country but capital controls won't stop queues at the ATMs with people looking to hoard cash.

I'm not an economist but here's an extract of an article from two Icelandic ones.

Note that these economists see capital controls of the sort imposed on Iceland as unnessary:

I'd agree to some extent, although the existence of a Central Bank in the UK hasn't prevented retail customer bank runs such as Northern Rock - and of course the existence of the Central Bank of Iceland seems not to have quelled the fears of UK-based Icesave depositors. The contrasting case of the eurozone hasn't really seen such retail-deposit bank runs (except Cyprus), which suggests that the "daily cash" level hasn't been the primary level of concern in the banking crisis either in the eurozone or, despite a couple of incidences in the UK, elsewhere either.

Where we have seen runs is in corporate and large deposits, and in general they have moved out of any country whose banking system shows signs of instability - something Iceland's capital controls do prevent.

cordially,
Scofflaw

vinylbomb

Scofflaw wrote: »

Where we have seen runs is in corporate and large deposits, and in general they have moved out of any country whose banking system shows signs of instability - something Iceland's capital controls do prevent.

This is very relevant, given that Iceland's population is about 250,000.
Even if everyone withdrew as much in cash deposits as they could, it would have paled in comparison to the amounts that would have left the country in capital flight.

dlouth15

vinylbomb wrote: »

This is very relevant, given that Iceland's population is about 250,000.
Even if everyone withdrew as much in cash deposits as they could, it would have paled in comparison to the amounts that would have left the country in capital flight.

Which makes sense until you remember that they wiped out foreign bond holders and depositors (or at least put them on the long finger). These groups were unable to get their money out anyway. The only threat was a domestic bank run but with the Icelandic central bank standing by this was not going to happen.

This is why I'm inclined to agree with the economists I posted earlier. The primary purpose was to retain strength in the currency. But as they point out, there may have been better ways to do this.

dlouth15

Scofflaw wrote: »

I'd agree to some extent, although the existence of a Central Bank in the UK hasn't prevented retail customer bank runs such as Northern Rock - and of course the existence of the Central Bank of Iceland seems not to have quelled the fears of UK-based Icesave depositors. The contrasting case of the eurozone hasn't really seen such retail-deposit bank runs (except Cyprus), which suggests that the "daily cash" level hasn't been the primary level of concern in the banking crisis either in the eurozone or, despite a couple of incidences in the UK, elsewhere either.

Where we have seen runs is in corporate and large deposits, and in general they have moved out of any country whose banking system shows signs of instability - something Iceland's capital controls do prevent.

cordially,
Scofflaw

See answer given to vinylbomb.

Scofflaw

dlouth15 wrote: »

Which makes sense until you remember that they wiped out foreign bond holders and depositors (or at least put them on the long finger). These groups were unable to get their money out anyway. The only threat was a domestic bank run but with the Icelandic central bank standing by this was not going to happen.

This is why I'm inclined to agree with the economists I posted earlier. The primary purpose was to retain strength in the currency. But as they point out, there may have been better ways to do this.

There's a few billion in foreign money still in Iceland, trapped by the capital controls:

The restrictions are blocking as much as $8 billion in offshore krona holdings being divested, forcing them into other assets categories and making Sedlabanki “very concerned” of a bubble in the equity market, Sigridur Benediktsdottir, head of financial stability at the Reykjavik-based bank, said in an interview this month.

and others are less sanguine in their views on the likelihood of banks runs once capital controls are lifted:

The central bank has been reluctant to speed up the process to not risk the krona. It has held dual currency auctions to ease the country out of the restrictions, even as it also started support purchases of kronur in February. The bank now also refused to grant Landsbanki an exemption to the controls to pay 200 billion kronur to the governments of the U.K. and the Netherlands, Morgunbladid reported on May 11, without saying how it obtained the information.

“When the capital controls are abolished, the pension funds should be among the first ones to get out,” said Vidarsson. “The pension funds would never take a run with all their investments out of the country. Individuals, however, might take all their savings out of the economy as soon as they get the chance.”

http://www.bloomberg.com/news/2013-05-13/swelling-iceland-cash-raises-capital-control-risks-tm-ceo-says.html

In essence, Iceland seems to be stewing in a sealed capital bubble, and we're not going to know how things go in confidence terms until the capital controls are lifted.

cordially,
Scofflaw

dlouth15

Scofflaw wrote: »

There's a few billion in foreign money still in Iceland, trapped by the capital controls:

and others are less sanguine in their views on the likelihood of banks runs once capital controls are lifted:

http://www.bloomberg.com/news/2013-05-13/swelling-iceland-cash-raises-capital-control-risks-tm-ceo-says.html

In essence, Iceland seems to be stewing in a sealed capital bubble, and we're not going to know how things go in confidence terms until the capital controls are lifted.

cordially,
Scofflaw

Basically you're pointing out the problems arising from maintaining capital controls too long. You get an unhealthy build up of capital in the country and difficulty then lifting the restrictions.

The economists I quoted earlier argued that capital controls were causing more damage than good and I agree with them.

I think my initial point stands: that after wiping out foreign depositors and bond holders in failed banks, the main problem then becomes the danger of a domestic bank run and this is adequately addressed by assuring the population that the central bank is ready if necessary to provide liquidity.

Scofflaw

dlouth15 wrote: »

Basically you're pointing out the problems arising from maintaining capital controls too long. You get an unhealthy build up of capital in the country and difficulty then lifting the restrictions.

The economists I quoted earlier argued that capital controls were causing more damage than good and I agree with them.

I think my initial point stands: that after wiping out foreign depositors and bond holders in failed banks, the main problem then becomes the danger of a domestic bank run and this is adequately addressed by assuring the population that the central bank is ready if necessary to provide liquidity.

Well, no, I was pointing out that a good chunk of money trapped by the capital controls in the Icelandic banking system was money that would otherwise have fled. $8bn is not pocket change in the context of the Icelandic banking system.

On top of that, the capital controls also prevent individual depositors from fleeing the Icelandic banking system, and the article covers the point that there is likely to be pent-up demand there too.

In short, I don't think the absence of a cash run on the Icelandic banks can be taken as evidence of confidence in the backing of the Icelandic central bank when there's (a) little evidence of such cash runs elsewhere, and (b) evidence that in the absence of capital controls Icelandic banks would likely be suffering the same kind of non-cash "silent" bank runs that have been a feature of lack of confidence elsewhere.

cordially,
Scofflaw

dlouth15

Scofflaw wrote: »

Well, no, I was pointing out that a good chunk of money trapped by the capital controls in the Icelandic banking system was money that would otherwise have fled. $8bn is not pocket change in the context of the Icelandic banking system.

On top of that, the capital controls also prevent individual depositors from fleeing the Icelandic banking system, and the article covers the point that there is likely to be pent-up demand there too.

In short, I don't think the absence of a cash run on the Icelandic banks can be taken as evidence of confidence in the backing of the Icelandic central bank when there's (a) little evidence of such cash runs elsewhere, and (b) evidence that in the absence of capital controls Icelandic banks would likely be suffering the same kind of non-cash "silent" bank runs that have been a feature of lack of confidence elsewhere.

Again, your points relate to problems building up due to the presence of capital controls agreed with the IMF for the purposes of currency stabilisation in return for a bailout. This happened some time after the initial setting up of new banks and the wiping out (or turning into claims) of the bond holders and foreign depositors.

What your not addressing, with respect, is that at the peak of the crisis when the initial action was taken to set up the new banks, the holders of foreign deposits and bonds could not have caused a run because these funds no longer existed as bonds and deposits with the new banks.

What you need to provide, if you are trying to make the case that it was primarily capital controls that prevented a bank run is some document from the time (e.g. the IMF agreement) stating that this was their purpose. I think you will find however, that most of the commentary suggests different reasons for the imposition of controls, e.g. this from Friðrik Már Baldursson who, unlike the previous economists I quoted, supports capital controls, though not for reasons of preventing a bank run:

It would have been highly risky not to impose capital controls. Firms’ debt was largely in foreign currency and households also had a significant amount of such debt. The remainder of lending was to a large extent indexed to the consumer price index which is highly sensitive to exchange-rate movements. As the carry-trade inflows which had supported the krona until the end of 2007 were first halted and then reversed, the exchange rate depreciated by 40% over the first three quarters of 2008. By October inflation was approaching 20% and inflation and exchange rate–linked debt shot up. Balance sheets of most firms and many households were already in tatters. But it was still crucially important to stabilise the exchange rate in order to prevent even more damage.

Scofflaw

dlouth15 wrote: »

Again, your points relate to problems building up due to the presence of capital controls agreed with the IMF for the purposes of currency stabilisation in return for a bailout. This happened some time after the initial setting up of new banks and the wiping out (or turning into claims) of the bond holders and foreign depositors.

What your not addressing, with respect, is that at the peak of the crisis when the initial action was taken to set up the new banks, the holders of foreign deposits and bonds could not have caused a run because these funds no longer existed as bonds and deposits with the new banks.

What you need to provide, if you are trying to make the case that it was primarily capital controls that prevented a bank run is some document from the time (e.g. the IMF agreement) stating that this was their purpose. I think you will find however, that most of the commentary suggests different reasons for the imposition of controls, e.g. this from Friðrik Már Baldursson who, unlike the previous economists I quoted, supports capital controls, though not for reasons of preventing a bank run:
It would have been highly risky not to impose capital controls. Firms’ debt was largely in foreign currency and households also had a significant amount of such debt. The remainder of lending was to a large extent indexed to the consumer price index which is highly sensitive to exchange-rate movements. As the carry-trade inflows which had supported the krona until the end of 2007 were first halted and then reversed, the exchange rate depreciated by 40% over the first three quarters of 2008. By October inflation was approaching 20% and inflation and exchange rate–linked debt shot up. Balance sheets of most firms and many households were already in tatters. But it was still crucially important to stabilise the exchange rate in order to prevent even more damage.

IMF Survey online: Iceland’s program with the IMF expired in August this year, ending three years of close cooperation. What do you regard as the main achievements of the program?

Kozack: The program had three objectives: to stabilize the exchange rate, put the public finances on a sustainable path, and restructure the financial system. All three of these objectives were met by the time the program expired. This was really an enormous achievement, given the severity and depth of the crisis that Iceland faced at the time.

The exchange rate had depreciated sharply in the run-up to the crisis, and there was a deep concern that it would plummet in a disorderly way. This is why capital controls were imposed.

http://www.imf.org/external/pubs/ft/survey/so/2011/surveyartf.htm

That is, to prevent money flooding out of Iceland, which would include a run on the Icelandic banking system.

Other such IMF comments:

Banks are well capitalized, profitable, and liquid. Nevertheless, although progress has been made, significant legacy risks remain. In particular, banks remain reliant on locked-in deposits resulting from capital controls, nonperforming loan ratios have stabilized at still-high levels, and indexation imbalances have increased.

Reducing vulnerabilities in the financial sector

12. Banks’ balance sheets have strengthened but risks still need to be addressed. The three largest banks are profitable and well-capitalized but nonperforming loan ratios are still high, though well below their post-crisis peak. Although progress has been made, legacy risks remain, including a reliance on deposits locked in by capital controls, asset-liability mismatches, and loan and deposit concentration.

http://www.imf.org/external/np/ms/2012/092812.htm

I don't know whether that amounts to stating that locking deposits into the Icelandic banking system was part of the purpose of the capital controls, but I haven't claimed that, only that the capital controls are preventing a run on the Icelandic banks because there's nowhere for them to run to, and have had that effect since they were imposed. That the likelihood of a sudden capital outflow on the lifting of capital controls is still a major concern at this stage suggests that confidence in the Central Bank of Iceland is not as high as you believe.

And, as I said, the trapped money isn't a new phenomenon - this is from 2009:

Restrictions on foreign-currency inflows for new investment will be removed first. Provided that goes well, the central bank said, the next phase will be removing capital-outflow restrictions, an action that will unlock foreign capital trapped in Iceland since the crisis erupted.

dlouth15 wrote:

What your not addressing, with respect, is that at the peak of the crisis when the initial action was taken to set up the new banks, the holders of foreign deposits and bonds could not have caused a run because these funds no longer existed as bonds and deposits with the new banks.

I think that may be inaccurate. As far as I know, deposits in Iceland were guaranteed, and moved over to the new banks, while the branches and subsidiaries abroad were let fail without recourse. That means that the deposits that were wiped out were deposits in the UK and Holland, not in Iceland, whether the deposits in Iceland were those of foreign entities or not. The difference is between "foreign holders of deposits in Iceland" and "holders of foreign deposits" - the latter did disappear, but would not in any case have affected exchange rates, been subject to capital controls, or been backed by the Icelandic Central Bank, making them irrelevant to our argument, I think.

cordially,
Scofflaw

dlouth15

Scofflaw wrote: »

I'd agree to some extent, although the existence of a Central Bank in the UK hasn't prevented retail customer bank runs such as Northern Rock - and of course the existence of the Central Bank of Iceland seems not to have quelled the fears of UK-based Icesave depositors. The contrasting case of the eurozone hasn't really seen such retail-deposit bank runs (except Cyprus), which suggests that the "daily cash" level hasn't been the primary level of concern in the banking crisis either in the eurozone or, despite a couple of incidences in the UK, elsewhere either.

Where we have seen runs is in corporate and large deposits, and in general they have moved out of any country whose banking system shows signs of instability - something Iceland's capital controls do prevent.

Scofflaw

I missed this point about Northern Rock earlier so I'll address it now.

It's fairly easy to see why the existence of a central bank ready to print money would have reassured Icelanders and prevented a run. Sure, capital controls may still be necessary to prevent irrational currency devaluations and prevent capital flight from the general economy but the general acute problem of a run was solved by the existence of the central bank in the case of Iceland.

As Andrew puts it:

1) Ireland is in the Euro, Iceland isn't. This meant that the Icelandic central bank could always print enough Kroner to ensure that it's banks didn't run out of money, even in the event that they become insolvent. Ireland wouldn't have been able to do this.

So why didn't the existence of the Bank of England prevent a run on Northern Rock?

I think what you've got to remember here is that the whole of Iceland's baking system failed, not merely one or two banks out of I don't know how many exist in Britain therefore the relationship between the Icelandic central bank and the new banks of Iceland was at that point entirely different to that of the Bank of England and a particular dodgy bank.

Northern Rock was not the entire banking system of Iceland and the Bank of England's remit is not to save each and every bank as it falls. Depositors in Northern Rock knew this, hence the run. The Icelanders, on the other hand, knew that the new banks could not possibly be allowed to fail and they also knew that their central bank has the capability to print enough to keep the new banks liquid.

I think this also addresses some of your other points about the purpose of capital controls. If you don't understand the normal relationship between a central bank and individual banks vs a central bank and the entire banking system then you are likely to place more emphasis on things like capital controls as a means of preventing bank runs.

dlouth15

Getting back to the main point of the thread: can we learn anything from Iceland?

I think another point to be made is the distinction between the Icelandic government and Iceland as a whole. I don't think we can learn a whole lot from the Icelandic government. They didn't appear to see any of the problems coming and when they crisis hit they had no choice but to act along the lines they did. They were lucky that they weren't in the Euro at that point so the solution they eventually were forced into worked after a fashion. It was the actions of the President and the people of Iceland that prevented a lot of money leaving the country to pay Icesave depositors. The government of Iceland were fully prepared to pay this money.

The Irish government likewise did not see the problems coming. There was no central bank dedicated to Ireland so the sort of solution available to Iceland was not available to Ireland. But we were lucky that the banking problem was just small enough that the guarantee put in place allowed the banks to continue functioning and there was no immediate run (though it caused problems later as the economy deteriorated). The president has a different role in Ireland so the Irish people were never given the opportunity to hold back on payments to foreign bond holders in the Irish system.

I think in a way Iceland was lucky that their banking problem was so big that they had to do what they did. It would be much worse for them if their system was a bit smaller and they were tempted to rescue the whole thing, like Ireland. Despite problems remaining, I'm not sure they would have had the sort of recovery they have enjoyed if a rescue was just about possible.

Scofflaw

dlouth15 wrote: »

I missed this point about Northern Rock earlier so I'll address it now.

It's fairly easy to see why the existence of a central bank ready to print money would have reassured Icelanders and prevented a run. Sure, capital controls may still be necessary to prevent irrational currency devaluations and prevent capital flight from the general economy but the general acute problem of a run was solved by the existence of the central bank in the case of Iceland.

As Andrew puts it:

So why didn't the existence of the Bank of England prevent a run on Northern Rock?

I think what you've got to remember here is that the whole of Iceland's baking system failed, not merely one or two banks out of I don't know how many exist in Britain therefore the relationship between the Icelandic central bank and the new banks of Iceland was at that point entirely different to that of the Bank of England and a particular dodgy bank.

Northern Rock was not the entire banking system of Iceland and the Bank of England's remit is not to save each and every bank as it falls. Depositors in Northern Rock knew this, hence the run. The Icelanders, on the other hand, knew that the new banks could not possibly be allowed to fail and they also knew that their central bank has the capability to print enough to keep the new banks liquid.

I think this also addresses some of your other points about the purpose of capital controls. If you don't understand the normal relationship between a central bank and individual banks vs a central bank and the entire banking system then you are likely to place more emphasis on things like capital controls as a means of preventing bank runs.

Again, there are problems with this argument. First, no UK bank was allowed to fall - Northern Rock was nationalised and then sold - which means that the Bank of England and the Bank of Iceland did exactly the same in terms of saving banks.

Second, the entire Irish banking system failed, as did Iceland's, yet despite the absence of an Irish Central Bank with money-printing capabilities, there was no retail run on Irish banks as there was on Northern Rock.

So, looking at the argument that it was the existence of a money-printing Central Bank that prevented a run on the Icelandic banks, we find that:

(a) the presence of a money-printing Central Bank didn't prevent a retail bank run in a country with similar problems, and whose Central Bank acted similarly (UK);

and

(b) the absence of a money-printing Central Bank didn't lead to a retail bank run in a country with similar problems that lacked one (Ireland, or any eurozone country)

In fact, with the exception of Northern Rock, we've been spared retail bank runs despite the severity of the crisis. Seeking a special explanation for Icelandic banks not having one, then, seems redundant first off, and then requires a large degree of special pleading.

What we have seen is capital flight - that is, the flight of large deposits, particularly corporate ones - and that being what capital controls are intended to prevent, their role in preventing capital flight seems rather important. I don't think there's any comfort for foreign depositors in the idea of the Bank of Iceland printing currency - quite the contrary!

cordially,
Scofflaw

dlouth15

Scofflaw wrote: »

Again, there are problems with this argument. First, no UK bank was allowed to fall - Northern Rock was nationalised and then sold - which means that the Bank of England and the Bank of Iceland did exactly the same in terms of saving banks.

But you leaving out important details here and you haven't addressed the point I made earlier. The Bank of England is not set up to provide infinite liquidity to badly run banks. Otherwise there would be little incentive for banks generally to run their operations wisely. Depositors in Northern Bank at this stage would have known this, that there was a possibility that the bank might fail and therefore were concerned for their money.

Iceland's banks had already failed at the point at which we're discussing and the central banks role would have been to provide whatever liquidity was required to keep the ATMs running. There was no question of them under the circumstances cutting off liquidity.

I hope you can see the difference.

Second, the entire Irish banking system failed, as did Iceland's, yet despite the absence of an Irish Central Bank with money-printing capabilities, there was no retail run on Irish banks as there was on Northern Rock.

I think it is more accurate to say that it was on the verge of failure at the point at which the blanket guarantee came in.

You are correct, though, that a run was prevented by the blanket guarantee. But this in itself has had the effect of making the Irish state pick up the tab for poor banking decisions.

So, looking at the argument that it was the existence of a money-printing Central Bank that prevented a run on the Icelandic banks, we find that:

(a) the presence of a money-printing Central Bank didn't prevent a retail bank run in a country with similar problems, and whose Central Bank acted similarly (UK);

And nor would it have under those circumstances which were very different from Iceland after the failure of their banking systems.

(b) the absence of a money-printing Central Bank didn't lead to a retail bank run in a country with similar problems that lacked one (Ireland, or any eurozone country)

But it would have done had it not been for the blanket guarantee. The option to let bad banks fail and set up new ones was not available to us. See Andrew's post earlier.

In fact, with the exception of Northern Rock, we've been spared retail bank runs despite the severity of the crisis. Seeking a special explanation for Icelandic banks not having one, then, seems redundant first off, and then requires a large degree of special pleading.

I can see why you might think this until you take the other factors into consideration. The topic under discussion is whether or not we can learn from Iceland's experience. Unfortunately (or fortunately, depending on your perspective), the dramatic solution they eventually were forced into was not available to Ireland and we were forced to implement the blanket guarantee.

What we have seen is capital flight - that is, the flight of large deposits, particularly corporate ones - and that being what capital controls are intended to prevent, their role in preventing capital flight seems rather important. I don't think there's any comfort for foreign depositors in the idea of the Bank of Iceland printing currency - quite the contrary!

I think currency controls may have had a role in preventing bank runs in Iceland. There is no way of knowing. Certainly the rationale for them very shortly after the peak of the crisis was not bank runs but rather stabilisation of the currency (there are reasons for wanting only limited depreciation, as businesses with inflation liked loans or loans linked to foreign currency might not be able to cope). There are also occasions where capital flight occurs damaging the economy but you don't get bank runs. Ireland has been through phases of this, for example. However you do have a point, if only a weak one.

Scofflaw

dlouth15 wrote: »

But you leaving out important details here and you haven't addressed the point I made earlier. The Bank of England is not set up to provide infinite liquidity to badly run banks. Otherwise there would be little incentive for banks generally to run their operations wisely. Depositors in Northern Bank at this stage would have known this, that there was a possibility that the bank might fail and therefore were concerned for their money.

Iceland's banks had already failed at the point at which we're discussing and the central banks role would have been to provide whatever liquidity was required to keep the ATMs running. There was no question of them under the circumstances cutting off liquidity.

Which would mean that it's not the existence of a money-printing central bank per se that produces the comfort that prevents bank runs, but the public perception of central bank policy. The UK public perceived that the BoE might not hold Northern Rock up, and panicked - the Icelandic public perceived that the BoIc had no choice, and therefore didn't. Each bank has equal powers to print currency.

That is rather different from the original claim that one of the lessons to be learned from Iceland is the comforting role of the existence of a national central bank perceived to be willing to print its national currency as required. Insofar as central banks provide such comfort, it seems instead to be a question of their perceived willingness to stand over the banks, and is equally applicable to the ECB.

Instead, it seems that the correct claim is that what comforts people is the perception of a central bank for the currency willing to stand over the banks, which is hardly news.

dlouth15 wrote: »

I hope you can see the difference.
I think it is more accurate to say that it was on the verge of failure at the point at which the blanket guarantee came in.

You are correct, though, that a run was prevented by the blanket guarantee. But this in itself has had the effect of making the Irish state pick up the tab for poor banking decisions.

That would be the same in the Icelandic case, though.

dlouth15 wrote: »

And nor would it have under those circumstances which were very different from Iceland after the failure of their banking systems.

But it would have done had it not been for the blanket guarantee. The option to let bad banks fail and set up new ones was not available to us. See Andrew's post earlier.

Er, yes it was, just as Anglo has been split into good and bad parts. The State didn't do it, but it could have been done.

dlouth15 wrote: »

I can see why you might think this until you take the other factors into consideration. The topic under discussion is whether or not we can learn from Iceland's experience. Unfortunately (or fortunately, depending on your perspective), the dramatic solution they eventually were forced into was not available to Ireland and we were forced to implement the blanket guarantee.

Well, no - they were forced, certainly, because their banks were something like 10 times their GDP as opposed to our 3.5 times. We had the choice they lacked, and, just as they would rather have done, we didn't opt for the immediate resolution of the banks. Instead, we were forced slowly into it as the solutions we had opted for crumbled under the weight of the banks' bad decisions.

dlouth15 wrote: »

I think currency controls may have had a role in preventing bank runs in Iceland. There is no way of knowing. Certainly the rationale for them very shortly after the peak of the crisis was not bank runs but rather stabilisation of the currency (there are reasons for wanting only limited depreciation, as businesses with inflation liked loans or loans linked to foreign currency might not be able to cope). There are also occasions where capital flight occurs damaging the economy but you don't get bank runs. Ireland has been through phases of this, for example. However you do have a point, if only a weak one.

Stabilisation of the currency is exactly the same thing as preventing bank runs, though, because it's the capital flight from the currency abroad that destabilises the currency. Sure, it's broader, in the sense that it also prevents flight from krone denominated shares, but to a large extent, stopping money fleeing the country is stopping money fleeing the national banking system.

The point remains the same, which is that the capital controls have trapped a large amount of money (relative to the Icelandic economy) inside the Icelandic economy, and within their banking system. In the absence of those controls, that money would have fled abroad and left the Icelandic banking system, despite the supposed comfort offered by the CBoIc's power to print krone (indeed, such a power is very worrying for foreign money).

In short, I can't see that "have your own national currency and central bank" is a lesson that can be drawn from Iceland, at least in the way that you are trying to draw it. What counts is the perceived policy of the central bank, and the currency is irrelevant, although one could make the point that the ECB being willing to provide liquidity to the Irish banking system within the euro is less damaging than the CBoIre doing so within the punt, because the inflationary/currency exchange effects of the former are far smaller than those of the latter.

cordially,
Scofflaw

dlouth15

Scofflaw wrote: »

Which would mean that it's not the existence of a money-printing central bank per se that produces the comfort that prevents bank runs, but the public perception of central bank policy. The UK public perceived that the BoE might not hold Northern Rock up, and panicked - the Icelandic public perceived that the BoIc had no choice, and therefore didn't. Each bank has equal powers to print currency.

That is rather different from the original claim that one of the lessons to be learned from Iceland is the comforting role of the existence of a national central bank perceived to be willing to print its national currency as required. Insofar as central banks provide such comfort, it seems instead to be a question of their perceived willingness to stand over the banks, and is equally applicable to the ECB.

Yes, if you like. I wasn't making a claim about central banks in general but a specific one about the central bank in Iceland at that particular time. But I already explained this in an earlier post.

The existence of a central bank in Iceland at that time with a willingness to provide whatever liquidity was required was what enabled them to prevent a bank run before any capital controls were put in place.

Instead, it seems that the correct claim is that what comforts people is the perception of a central bank for the currency willing to stand over the banks, which is hardly news.

Now you have it. From the context of the thread you will see that this is exactly what I meant. You gave the strong impression of not understanding that a central bank under such circumstances of Iceland at the time will provide whatever liquidity is necessary and therefore the people have no need to worry that the banks will run dry.

Whatever your understanding up until now I'm glad we agree that this is the case.

[On the issue of the banks being on the verge of failure in Ireland but not yet failed]

That would be the same in the Icelandic case, though.

No, the banks actually failed in Iceland. They were not bailed out at that time. New banks were set up and Icelandic deposits moved to them as well as assets from the old banks. The entire banking system was recreated almost overnight.

It was at this stage that a run might have happened if Iceland did not have it's own central bank.

[On the issue of splitting the banks into two parts in Iceland]

Er, yes it was, just as Anglo has been split into good and bad parts. The State didn't do it, but it could have been done.

Yes, but the State in the case of Ireland was on the hook for all the poor assets and debts of the bad bank. What Iceland did was let the bad part of it fail. Ireland could not have got away with this because we did not have a central bank to support the good bank unlike Iceland. The ECB, I think we can agree, would not have countenanced it at that time, especially under Trichet.

[On whether or not Ireland was forced into the blanket guarantee.]

Well, no - they [Iceland] were forced, certainly, because their banks were something like 10 times their GDP as opposed to our 3.5 times. We had the choice they lacked, and, just as they would rather have done, we didn't opt for the immediate resolution of the banks. Instead, we were forced slowly into it as the solutions we had opted for crumbled under the weight of the banks' bad decisions.

My recollection of events is that next to no solutions were applied in Ireland until shortly before the blanket guarantee was put into place. By which time it was too late. Both countries are alike in that they did not see the problems coming and did not implement the proper solutions in good time.

Something like an Icelandic solution in Ireland would only have been possible, as I've said a number of times might have been possible (there would have been differences in Ireland's case) but only if Ireland had at that time, its own cenctral bank. It did not, so we got the blanket guarantee.

You are correct, however, in that the blanket guarantee would not have been available to Iceland given the size of its banks prior to collapse. The irony is that they seem to have been lucky because of this. If the banking system there had been sufficiently small they would have gone for it and suffered a much longer recession without the recovery they have seen. I'm not suggesting here that they don't still have many problems, but most observers would agree that they have done very well considering the scale of their initial crisis.

Stabilisation of the currency is exactly the same thing as preventing bank runs, though, because it's the capital flight from the currency abroad that destabilises the currency. Sure, it's broader, in the sense that it also prevents flight from krone denominated shares, but to a large extent, stopping money fleeing the country is stopping money fleeing the national banking system.

While I don't agree that "stabilisation of the currency is exactly the same thing as preventing bank runs", I do agree that capital controls may help in preventing money leaving the banking system. It may be preventing bank runs in Cyprus for example, but this is because they have no other option but to implement them. Where I disagree is the extent of the need for them in Iceland. I've already put forward reasons for this so I won't repeat them again.

What I'm glad we agree on is my initial point on this thread that the existence of Iceland's central bank and it's ability to provide liquidity to the new banks, in itself, helped prevent a bank run. I'm willing to take the charitable view that you thought I was talking about central banks in general (including the ECB) and not the Icelandic central bank at that point in time when you were raising your objections.

Scofflaw

dlouth15 wrote: »

Yes, if you like. I wasn't making a claim about central banks in general but a specific one about the central bank in Iceland at that particular time. But I already explained this in an earlier post.

The existence of a central bank in Iceland at that time with a willingness to provide whatever liquidity was required was what enabled them to prevent a bank run before any capital controls were put in place.

Now you have it. From the context of the thread you will see that this is exactly what I meant. You gave the strong impression of not understanding that a central bank under such circumstances of Iceland at the time will provide whatever liquidity is necessary and therefore the people have no need to worry that the banks will run dry.

Whatever your understanding up until now I'm glad we agree that this is the case.

Well, where I disagreed was fundamentally on the point that this was something that we needed to learn from Iceland, since the same happened in Ireland - bank runs were prevented by belief that the sovereign and/or central bank would stand over the deposit guarantee. In addition, or perhaps on the contrary, I think capital controls have remained necessary in Iceland to prevent deposit flight, while they have never been instituted in Ireland. There wasn't exactly much of a time gap between the bank failures and capital controls in Iceland - the controls came in on the 6th October 2008, the day before Landsbanki and Glitnir were handed over to receivers, and three days before Kaupthing went the same route.

dlouth15 wrote: »

[On the issue of the banks being on the verge of failure in Ireland but not yet failed]

No, the banks actually failed in Iceland. They were not bailed out at that time. New banks were set up and Icelandic deposits moved to them as well as assets from the old banks. The entire banking system was recreated almost overnight.

It was at this stage that a run might have happened if Iceland did not have it's own central bank.

The capital controls were in place by that point. I do agree, as I said, that a central bank willing to stand over the deposits is a necessity, but it's impossible to judge the amount of confidence inspired by the CBoIc in the presence of capital controls.

dlouth15 wrote: »

[On the issue of splitting the banks into two parts in Iceland]

Yes, but the State in the case of Ireland was on the hook for all the poor assets and debts of the bad bank. What Iceland did was let the bad part of it fail. Ireland could not have got away with this because we did not have a central bank to support the good bank unlike Iceland. The ECB, I think we can agree, would not have countenanced it at that time, especially under Trichet.

That I'm not sure about, although certainly Trichet was not particularly accommodating - on the other hand, it was European pressure that got Anglo split up in the end. What we do know is that it wasn't requested.

dlouth15 wrote: »

[On whether or not Ireland was forced into the blanket guarantee.]

My recollection of events is that next to no solutions were applied in Ireland until shortly before the blanket guarantee was put into place. By which time it was too late. Both countries are alike in that they did not see the problems coming and did not implement the proper solutions in good time.

Something like an Icelandic solution in Ireland would only have been possible, as I've said a number of times might have been possible (there would have been differences in Ireland's case) but only if Ireland had at that time, its own cenctral bank. It did not, so we got the blanket guarantee.

You are correct, however, in that the blanket guarantee would not have been available to Iceland given the size of its banks prior to collapse. The irony is that they seem to have been lucky because of this. If the banking system there had been sufficiently small they would have gone for it and suffered a much longer recession without the recovery they have seen. I'm not suggesting here that they don't still have many problems, but most observers would agree that they have done very well considering the scale of their initial crisis.

Sure - I'm on record here a few years ago saying that what I was expecting was that Ireland would turn out to be absolutely at the limit of sustainability, where Iceland and Greece were clearly over it, which meant that in effect we would suffer the maximum possible misery without having a clear case for the drastic measures made available to or taken by those countries.

dlouth15 wrote: »

While I don't agree that "stabilisation of the currency is exactly the same thing as preventing bank runs", I do agree that capital controls may help in preventing money leaving the banking system. It may be preventing bank runs in Cyprus for example, but this is because they have no other option but to implement them. Where I disagree is the extent of the need for them in Iceland. I've already put forward reasons for this so I won't repeat them again.

What I'm glad we agree on is my initial point on this thread that the existence of Iceland's central bank and it's ability to provide liquidity to the new banks, in itself, helped prevent a bank run. I'm willing to take the charitable view that you thought I was talking about central banks in general (including the ECB) and not the Icelandic central bank at that point in time when you were raising your objections.

And I hate to refuse your charity, but must, alas! I am specifically disagreeing that one can make such a claim about Iceland's central bank during the collapse of their banking system because of the existence of highly confounding factors, specifically the capital controls whose institution preceded the collapse of the banks, but to a lesser extent also the small size and high social cohesion of Iceland.

regretfully,
Scofflaw

dlouth15

Scofflaw wrote: »

And I hate to refuse your charity, but must, alas! I am specifically disagreeing that one can make such a claim about Iceland's central bank during the collapse of their banking system because of the existence of highly confounding factors, specifically the capital controls whose institution preceded the collapse of the banks, but to a lesser extent also the small size and high social cohesion of Iceland.

The claim I made was that the existence of an Icelandic central bank ready to provide liquidity helped stop a bank run in Iceland. This is the claim you started to dispute but after arguments were put forward to dispute it, you eventually conceded that it was true. Your assertion that capital controls, though they may have played a role, prevented a bank run was shown to be lacking foundation. You failed to show that there would have been a run had they not been put in place as there are reasons for having them that have nothing to do with bank runs and indeed the official reason for them was currency stabilization. You provided an incorrect date for the eventual imposition of said controls. The correct date is the 1st of November of that year.

I'm not going to continue further with this because my initial remark you eventually agreed with: that the central bank's ability to provide liquidity, in itself helped run. I don't know whether your misinterpretation of my initial post was genuine or whether it was a face saving measure to avoid admitting that you lost the argument but that is not really important now.

Scofflaw

dlouth15 wrote: »

The claim I made was that the existence of an Icelandic central bank ready to provide liquidity helped stop a bank run in Iceland. This is the claim you started to dispute but after arguments were put forward to dispute it, you eventually conceded that it was true. Your assertion that capital controls, though they may have played a role, prevented a bank run was shown to be lacking foundation. You failed to show that there would have been a run had they not been put in place as there are reasons for having them that have nothing to do with bank runs and indeed the official reason for them was currency stabilization. You provided an incorrect date for the eventual imposition of said controls. The correct date is the 1st of November of that year.

I'm not going to continue further with this because my initial remark you eventually agreed with: that the central bank's ability to provide liquidity, in itself helped run. I don't know whether your misinterpretation of my initial post was genuine or whether it was a face saving measure to avoid admitting that you lost the argument but that is not really important now.

I'm sorry you feel that we've got tangled on this - I do hope it won't put you off arguing with me in future, because I respect your willingness to engage in a factual way with issues. My disagreement with you on this point is, however, neither a face-saving exercise nor a misunderstanding. Let me clarify my position, which is at least two-thirds disagreement.

You stated "the existence of an Icelandic central bank ready to provide liquidity helped stop a bank run in Iceland". I said that the imposition of capital controls probably had more to do with it, and have also stated that there's nothing we can actually learn from Iceland in the matter.

I distinguished two types of bank run - a retail bank run - that is, local people lining up outside the bank to withdraw their savings, and a 'deposit flight', which consists of higher-value 'mobile money' fleeing the country's banking system.

In the case of the latter, I cannot see how the CBI's willingness to provide liquidity has any positive effect - because for foreign depositors the provision of liquidity by the ICB would in any case damage the value of their deposits through the effects on exchange rates. So I see capital controls, of the two, as entirely responsible for preventing this type of bank run.

In the case of the former, I do agree that it may have helped, but cannot regard the matter as provable, because capital controls were instituted simultaneously with the nationalisations. As such, while one might feel that the ICB provided a "no need to run", that's effectively superseded by the capital controls' "nowhere to run anyway". We cannot know that Icelanders felt sufficiently reassured by the ICB not to flee the Icelandic banking system for foreign banking systems, because they didn't have that option - and that's before we get onto the difficulties and disadvantages of moving their money, or whether they might have been concerned by the possibility of retaliatory seizures in foreign jurisdictions.

Finally, on whether this is something we can "learn from Iceland" on, I can't see what we would be supposed to be learning. There were no retail bank runs in Iceland, certainly, but there were no retail bank runs in the eurozone either. What we learn from that, if you like, is that the ECB apparently does an equivalent job to the CBI, but without capital controls.

So, of four points, I would agree with you on one, but have to say that the point in question is a matter of opinion. The main thrust of my disagreement has been all along that this is not somewhere where we can learn from Iceland, at least if the lesson is supposed to be the value of national central banks and national currencies.

cordially,
Scofflaw

Sand

dlouth15 wrote: »

I'm not going to continue further with this because my initial remark you eventually agreed with: that the central bank's ability to provide liquidity, in itself helped run. I don't know whether your misinterpretation of my initial post was genuine or whether it was a face saving measure to avoid admitting that you lost the argument but that is not really important now.

Scofflaw likes to take a certain position on things.

Let me clarify my position, which is at least two-thirds disagreement.

4 pages and what, 10 posts in you're still having to explain what your position actually is? Brilliant.:D

The key thing Ireland could learn from Iceland is that Iceland always placed its own interests ahead of the interests of others. In Ireland, the reverse was true. Obviously Ireland and Iceland had different technical options, benefits and drawbacks but Ireland was never interested in working towards its own best interests.

Scofflaw

Sand wrote: »

Scofflaw likes to take a certain position on things.

It wouldn't make for much of a discussion if I didn't!

Sand wrote: »

4 pages and what, 10 posts in you're still having to explain what your position actually is? Brilliant.:D

Heh. Something like 2000 posts and 200 pages into the Creationism thread, I was still having to explain my position. Could still be doing so, if I wanted.

Sand wrote: »

The key thing Ireland could learn from Iceland is that Iceland always placed its own interests ahead of the interests of others. In Ireland, the reverse was true. Obviously Ireland and Iceland had different technical options, benefits and drawbacks but Ireland was never interested in working towards its own best interests.

I'm so sure that's unquestionably true it's surely not worth asking you for actual proof.

amused,
Scofflaw