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The proper term for what happened is the old banks were put into receivership. This has lasted for a lot longer than is healthy and the husks of the old banks are really poisonous to the economy and the political landscape. Some argue it would have been better to face the catastrophe of a crash than the languishing death spiral that ensued.

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>Some argue it would have been better to face the catastrophe of a crash

There was a crash, and the catastrophe was faced by putting the banks into receivership. The alternative was a public bailout, and is only preferable for people who make their incomes by investing in undercapitalized banks.

I meant: put through bankruptcy. That would have been catastrophic for the economy because Iceland would not have had a financial sector at all for some time.

I'm being pretty vague since I'm not really an expert, but yes the old banks were put into receivership but not bankruptcy. However, previous laws from 2002 already established that financial institutes would not go through normal bankruptcy ( http://www.althingi.is/altext/stjt/2002.161.html ), but I'm not sure how that would have worked out.

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