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Policy Contribution

A tale of three countries: recovery after banking crises

The purpose of this Policy Contribution is to compare the policy responses in, and the adjustments made byIceland, Ireland and Latvia. Based on this comparison, it draws lessons for exchange rate policy, internal devaluation, capital controls, banking sector restructuring and fiscal consolidation. It makes a strong case for a European banking federation.

By: Date: December 29, 2011 European Macroeconomics & GovernanceFinance & Financial Regulation Tags & Topics

Three small, open European economies — Iceland, Ireland and Latvia – experienced serious trouble during the global financial crisis. Behind their problems were rapid credit growth and expansion of other banking activities in the years leading up to the crisis, largely financed by international borrowing. The crisis hit Latvia harder than any other country, and Ireland also suffered heavily, while Iceland exited the crisis with the smallest fall in employment, despite the greatest shock to the financial system.

The purpose of this Policy Contribution is to compare the policy responses in, and the adjustments made by, the three countries. Based on this comparison, it draws lessons for exchange rate policy, internal devaluation, capital controls, banking sector restructuring and fiscal consolidation. It makes a strong case for a European banking federation.

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