Introduction

Iceland was one of the first countries to experience the collapse of its banks in the fourth wave of financial crises since the early 1980s. Each of these waves has involved the failure of a large number of banks in a country at about the same time. Each of these waves has followed a wave of credit bubbles, when the indebtedness of a group of borrowers, usually the buyers of real estate, increased at an annual rate of 20–30 per cent a year for two, three, or more years. Most of these credit bubbles have followed an increase in the flow of money to a country that led to an increase in the value of its currency, to an increase in its current account deficit and to increases in asset prices. (The principal exception is that the credit bubble in Japan in the second half of the 1980s occurred when its current account surplus was declining, however at the same time that the Japanese yen appreciated. The other exceptions are that the credit bubbles in Ireland and Spain occurred when they were members of the European Monetary Union.)