The Icelandic Bank collapse: challenges to governance and risk management

Abstract

Purpose The purpose of this paper is to examine the extreme case of the Icelandic banking crisis in relation to critical governance issues at governmental, industry and civil society levels. Design/methodology/approach This is a case study of the Icelandic banking collapse in 2008. Findings The examination of governance failures within the Icelandic banking system reveals that government institutions need to find a balance between entrepreneurial growth, risk exposure and sustainable societal development. A euphoric attitude of laissez‐faire, where risk issues and issues of balanced development are largely ignored, creates challenges for sustainable banking. The findings suggest that achieving the necessary balance requires stressing governance issues on three levels; at the government level; at the industry level; and at the civil society level. Practical implications The paper illustrates why some of the corporate governance challenges facing sustainable banking should be addressed at multiple levels. Government should strive for realistic information and evaluation of societal risks; government should implement adequate regulatory frameworks; the finance industry itself should have effective self‐regulatory procedures and mechanisms; and, from a civil society point of view, the public at large should have realistic expectations and be adequately alerted as to the potential risks of governance failure. Originality/value The paper examines interactions between governance failures at different levels and has important implications for governance and policy makers, particularly those faced with re‐structuring national financial industries.