Iceland 2008. From a Banking Crisis to a Sovereign Debt Crisis

Seminar paper from the year 2012 in the subject Economics - Finance, grade: 2,3, Johannes Gutenberg University Mainz, course: Seminar Financial Institutions, language: English, abstract: During the current financial crisis which started in the year 2007 with the bust of the American housing market and peaked with the collapse of Lehman Brothers we observe that many countries face difficulties with their domestic banking system. For instance Germany had problems with several Landesbanken, the Hypo Real Estate (HRE) and with Commerzbank or the United States struggled with the collapse of Merrill Lynch and Bear Stearns leading to an enforced merger with Bank of America and JP Morgan Chase respectively. In other countries problems in the banking system were more dramatic. After rumors in the United Kingdom about a collapse of Northern Rock people went immediately to the branches to withdraw their deposits. The picture spread the world when people waited outside in a queue of a branch of Northern Rock to get inside. To prevent a domestic bank run in the United Kingdom the government nationalized several financial institutions such as Royal Bank of Scotland; afterwards holding a stake of 95% in this particular institution. Nowadays Spain faces a huge banking crisis after the bust of the Iberian housing bubble. But what is the problem of having a banking crisis?