01 The Hour
10:15
Every day from 15 October 2008. Reykjavik.
The auction ran at a quarter past ten and the results went up on the central bank's website by eleven. It was run on a common price basis. Every bank could take part, and a bank could offer to sell foreign exchange as well as to buy it.
That forty-five minute window was, for a country that imports most of what it uses, the point at which the currency to pay for it was priced and handed over.
Ten days earlier there had been no window at all.
02 The Sequence
Around 5 Oct 2008 The foreign exchange market for the krona, both onshore and offshore, ceased operating. The reasons given afterwards were uncertainty about bank credit quality, uncertainty about the appropriate exchange rate, and an apparently huge excess supply of kronur.
6 Oct 2008 Parliament passed a law giving the financial supervisory authority far-reaching powers to deal with problem banks. In the following days it took control of all three, about 85 per cent of the banking system. The external payment systems were severely disrupted, which hampered the repatriation of export proceeds.
10 Oct 2008 Exchange guidelines were issued to the banks. Foreign exchange should be used for priority imports, and should not be used to support capital outflows. Banks could use the foreign exchange sold to them by exporters to fund their customers' imports, and go to the auction for their net requirements. Business outside the auction stayed permitted, provided the guidelines were observed.
15 Oct 2008 The first auction. It had been judged essential to restart at least some form of foreign exchange trading, both to provide currency in support of essential imports and as a starting point from which the market could find its own level. The auction method was chosen over administrative allotment or bilateral sales because it maximises transparency, and the process was discussed with the major banks in advance.
Mid-Oct to 28 Oct 2008 The policy rate was cut by 350 basis points in the middle of the month, then raised by 600 basis points to 18 per cent on 28 October, reversing the cut.
Oct to Nov 2008 The krona stabilised around the rate of the first auction, 150 to the euro, and the authorities made clear there was no exchange rate target. The central bank had expected to be a substantial supplier in the first auctions and a net supplier for some weeks, and was restricting the amount of its net sales.
Nov 2008 The central bank was gathering further information from the banks on the backlog of demand. It was agreed that the restrictions on current account transactions should be removed as soon as possible, and that the capital account restrictions would need to stay in place for longer. The restrictions on current international transactions had by then contributed to private external payment arrears, and the Fund gave the restriction temporary approval on the basis that it had been imposed for balance of payments reasons and was non-discriminatory.
03 The Hidden Dependency
The auction was the visible part. Read the guidelines of 10 October and the order of supply is the other way round.
A bank was to fund its customers' imports out of the foreign exchange that exporters had sold it, and go to the auction only for what was left over. The first source of currency for an importer was another firm's export receipts.
Which puts the weight on a link that was itself damaged. The same report records that the external payment systems were severely disrupted, hampering the repatriation of export proceeds. Fish and metal leaving the country had to turn into money that came back, and be sold to a bank, before a container could be paid for at the other end.
The first source of currency for an importer was another firm's export receipts.
04 What Still Worked
The Domestic Payment System
It went on functioning. Access to deposits and to cash machines was maintained throughout the crisis, supported by a new blanket guarantee on domestic deposits.
Business Outside The Auction
Banks stayed free to undertake foreign exchange business outside the daily auction, so long as they adhered to the guidelines, and the auction itself was two-sided, with banks able to offer currency for sale as well as bid for it.
The Exporter's Swap
Where an exporter had a short term need for foreign exchange, the central bank facilitated a swap rather than an outright sale, which kept the currency inside the system instead of paying it away.
05 The Plumbing
The Plumbing 15 October 2008
The mechanics are set out in a box of the Fund's staff report on Iceland's request for a stand-by arrangement.
The auction is run on a common price basis at 10:15 each day and the results are published on the central bank's website by 11:00. All banks can participate, and they can offer to sell foreign exchange as well as to buy it. Banks are required to supply the central bank with information on their purchases and sales, as confirmation that they are abiding by the exchange guidelines.
06 The Pattern Library
1 When one retail withdrawal channel closes or fails, demand concentrates on whichever channel is left open, and the capacity of that channel sets what a depositor can obtain.
Observed: Northern Rock 2007, Cyprus 2013, India 2016, Greece 2015, United States 1933, Argentina 2001, Lebanon 2019, Worldpay 2026, TSB 2018, Afghanistan 2021.
2 A currency replacement can require physical modification of each cash dispensing machine before the new notes can be issued, so the machine estate returns to service site by site rather than at once.
Observed: India 2016.
3 Withdrawal limits imposed on a domestic banking system can be written to exempt cards issued outside it, so one machine dispenses under two rules according to where the card was issued.
Observed: Greece 2015.
4 Domestic payment and deposit channels can continue operating while cross-border payment routes fail, with the central bank standing in as the intermediary for payments to and from the country.
Observed: Iceland 2008, Germany 1931.
5 When the institutions that convert payment instruments into cash are closed, wages and checks already received cannot be spent, and merchants and carriers extend their own credit in place of the missing conversion.
Observed: United States 1933.
6 A public employer short of the national currency can pay wages in an instrument it issues itself, which then circulates alongside the currency it stands in for.
Observed: Argentina 2001.
7 Withdrawal restrictions can be imposed by individual institutions and their trade association rather than by statute, so the limit differs from bank to bank and no law governs it.
Observed: Lebanon 2019.
8 A cash withdrawal ceiling set in nominal units has to be raised alongside the note denominations that pay it, because the ceiling can only be dispensed in the notes that exist.
Observed: Zimbabwe 2008.
9 A payment outage can hit card authorisation and merchant funding as separate faults, so acceptance at the terminal is restored while the money owed to the merchant arrives a day late under its own incident notice.
Observed: Worldpay 2026.
10 A retailer that loses electricity can go on trading by taking cash and rationing goods by hand, so the counter outlasts the checkout system that normally prices and settles the basket.
Observed: Texas 2021.
11 A systems migration can leave account records readable but wrong, including presenting one customer's account to another, so a working login is no guarantee that the balance on the screen belongs to the person reading it.
Observed: TSB 2018.
12 The size of a card processing failure can be counted twice, once on first attempts and once after the same card was presented again, and the second count can be about half the first, so part of the recovery runs through the cardholder at the till.
Observed: Visa Europe 2018.
13 A restriction on access to money can be written by purpose as well as by amount, so a balance that cannot be drawn in general becomes payable when it is used for wages, taxes or relief, and the test applied is what the money is for.
Observed: Germany 1931, Brazil 1990.
14 A deposit freeze can be paired with a transferable certificate issued against the frozen balance, so the deposit becomes a claim that can be sold before it is released, at a price the market sets rather than its face value.
Observed: Ecuador 1999, Argentina 2002.
15 A per head issue of a new currency can be distributed through the administration that issues food rations rather than through the banks, so the ration card is the proof of entitlement and the banks are used to collect the old money rather than to pay out the new.
Observed: Germany 1948.
16 When the persons under sanction become the governing institutions of a country, the prohibition reaches ordinary payments that merely touch the state, and access is restored by successive general licences written by activity, so what decides whether a payment can be made is which licence it falls under.
Observed: Afghanistan 2021.
17 One foreign currency held in one banking system can carry two prices at once, according to whether a balance was credited before or after the date the restrictions began, so the older money converts only at a rate the authority names.
Observed: Lebanon 2019.
18 A payment abroad can be made conditional on prior approval by a committee working to a ceiling set for the whole country each day, so what a firm can pay turns on the capacity of the approval process rather than on the balance in its account.
Observed: Greece 2015.
19 Scarce foreign exchange can be rationed through the commercial banks under published guidelines, with the central bank selling only the net requirement at a daily auction and checking compliance through reporting after the fact rather than approving each payment in advance.
Observed: Iceland 2008.
Changed today: No existing entry gained a case. Entry 4 already carries Iceland 2008. Entry 18 was considered and withheld: this case runs on a published daily auction and written guidelines applied at the banks, and the authorities chose that method over administrative allotment. Entry 19 added, on rationing delegated to the banks and checked by reporting.