Capital controls as a bargaining device: The case of Iceland

Abstract

In January 2016 a consortium of US based hedge funds voluntarily handed Íslandsbanki, an up-and-running Icelandic bank with equity worth $1.4 bn, to the Icelandic state without receiving compensation in return. Íslandsbanki was the single largest asset handed to the Icelandic state at this time in a transfer worth $2.8 bn in total. The transfer of assets and other related measures were a key step in the resolution of three Icelandic banks that collapsed during the banking crisis of October 2008. The resolution, in turn, eventually made it possible, in March 2017, to lift the strict capital controls Iceland had lived with since the crisis.