Essay Example on If there was a way that the Icelandic Recession could have been Prevented

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The one question we need to ask if there was a way that the Icelandic Recession could have been prevented Was there a way that it could have been stopped Three main things that needed to take place to prevent such a thing was for the takeover of the domestic operations of the three largest banks in Iceland get immediate help from the IMF and an approach to the EU Taking these approaches could have significantly saved this all from happening in the first place A loss of confidence in the banks by the international financial markets and international rating agencies was a factor that started this in 2006 The mini crisis lasted for a little bit but seemed to come back and lst in 2008 to play a role in the financial crisis Concerns began and started building up in 2005 The rapid growth of credit under some conditions such as Iceland was experiencing is a clear indication of an impending banking crisis There was concerned with the credit growth in the CEE countries as part of the countries where a boom was in happening including Iceland
The growth rates from the three year cumulative percentage should have alarmed many After such findings the CBI the prime minister of Iceland and the FME were approached They all were not interested in discussing this matter The authorities did not want to hear about any potential problems If the premium of a significant risk to other European banks the systematic risk should have been compared more with emerging market banks This was considered necessary to state that they not foresee a banking crisis in 2006 but considered that a greater risk premium was needed This raised concern over credit quality and the reliability of the stress testing that had been undertaken and the degree of leverage The reliance on short term funding the banks used was a serious flaw in their business model The warnings issued by researches should have been taken into account to take early action that could have prevented yet another factor The macroeconomic indicators in Iceland were among the worse in the world These indicators suggested that Icelandic economy was overheating with with account deficit in 2005 The ISK Icelandic Krona was overvalued because of the high interest rates that was at one hundred and twenty percent The economy was becoming increasingly dependent on foreign capital and international terms of lending Iceland was overheating but did not realize how overly willing they were to lend global financial markets
This finally raised the question if the Icelandic economy was now facing a recession but also a financial crisis at a severe level Imprudent monetary policy financial liberalization with weak prudential regulation and supervision and severe fiscal imbalances were seen as the main routes to the financial instability in the Icelandic economy Lenders in the debt and equity markets needed to have lss difficulty in differentiating whether a borrower represents good or bad risk Firms would only be prepared to pay the average price that would be lower than the true value for a higher quality firm If all that worked out like it should have the financial markets would have functioned correctly and credit rationing would not have occurred Ways to overcome this to have sufficient net worth of the borrower to cover the cost of a default and through the private production and sale of information about the potential borrower which if widely available that would led to a free rider problem A lack of disruption to financial markets where there is unbalanced information and hence adverse selection and hazardous morals become bad Which ultimately leads to the financial markets being unable to channel funds at an efficient rate to those with the most opportunities in a productive investment
These downfalls are the definition of financial instability This can occur after financial liberalisation when regulation is in its infancy and is not really effective simply because of a lack of experience Lack of banking expertise and below average regulation was a problem in Iceland This was all concluded in 1995 when they last adjusted financial liberalization There were many different factors that led to this crisis Many small and minor others had a major effect and drove the economy in one direction There have been discounted the parallels between the Nordic crisis and the Iceland crisis Creating inferences from a series of macroeconomic indicators and the existence of a regulatory body producing an erroneous and misleading picture of the Icelandic banking system while following accepted international banking standards These are just some knowledge to obtain when trying to see what went wrong More detailed knowledge of economic and political history and the political complexity and financial interlinkages which include a widespread of political patronage and an accurate picture This all an approach that is worth citing their concessions at length

This just shows the need to approach and understand the financial crisis that shows more than just relationships and variables in a macroeconomic format Furthermore there should have been a sense of urgency and help from the IMF in Iceland the EU should have been approached and the domestic approach of the three largest banks in Iceland should have been taken over The recession in Iceland is a important thing to know about It is also wise to know how things like this could have been prevented This shows how important ethics in business are because a lack of concern and moral hazards can cause something as big as a financial crisis The Icelandic recession is one of the most interesting cases in economic history


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