needed before we can assess to what degree such breathing space would have facilitated a more orderly and less costly episode than the complete collapse that took place. at any rate, it is clear that this limited ability was one of the factors behind the decision not to grant glitnir a loan of last resort amounting to €600 m, which it requested on 25 september in order to cover a loan repayment in mid - october. instead, the government, on the advice of the central bank, announced on 29 september that it was taking a 75 % equity stake in glitnir valued at €600 m. this implied a big fall from what such a stake was valued at in the market the week before. in the following week, the equity price collapsed further, ending the week 75 % below its value at the end of the preceding week. this action did not boost market confidence in the icelandic banking system. on the contrary, it intensified the run. on the following day, both the sovereign and the banks were baba, naohiko, frank packer and teppei nagano, ( 2008 ). “ the spillover of money market turbulance to fx swap and cross - currency swap markets ”, bis quarterly review, march 2008, 73 – 86 ; baba, naohiko, and frank packer, ( 2008 ). “ interpreting deviations from covered interest parity during the financial market turmoil of 2007 – 08 ”, bis working papers, no. 267. see also box iii - 1, “ the recent turmoil in the icelandic foreign exchange swap market ” in the central bank of iceland monetary bulletin 2008 / 1, pp. 26 – 29. downgraded by two notches, followed by widespread margin calls and closing of credit lines. the foreign deposits that had helped to alleviate the foreign liquidity squeeze experienced outflows. and the equity loss involved in the glitnir takeover created a domino effect within the icelandic financial system. it was becoming clear that the entire system was on the brink of collapse, and on 6 october 2008, the icelandic parliament passed emergency legislation with the objective of ensuring continued domestic banking operations. the following day, the icelandic financial supervisory authority ( fme ) intervened in the operations of glitnir and landsbanki. on october 8, following perfunctory exchanges between the uk chancellor of the exchequer and the icelandic minister of finance, the uk government froze the assets of icelandic banks in the uk and took over singer & fried

probably a scramble to get usd liquidity through fx swap markets, with the result that those markets became dysfunctional as well. this problem was significantly mitigated with the fx swap lines that the us fed negotiated with the ecb and other major central banks, especially after these became uncapped in some cases. but the problem was not confined to currency pairs involving the us dollar, and a similar kind of dynamic played out for smaller currencies in europe vis - a - vis the euro, especially where banking systems had significant short - term foreign refinancing needs, or what can also be called rollover risk in terms of foreign currency. in some cases, fx swap lines were granted vis - a - vis the dollar, the euro and the yen, and in some cases not. where swap lines were granted, it helped. and for some of the smaller players, it might not have mattered terribly much which of the major international currencies they hooked on to in this sense, especially after the uncapped swap lines had been established. what we observed during this peak of the crisis was thus a run on cross - border banking operations. we know how to solve such problems domestically by letting central banks lend to markets and / or institutions through their almost unlimited short - run capacity to expand their domestic balance sheet. however, when it comes to foreign currency, a central bank ’ s capacity to help banks to refinance the foreign liquidity denied them on the market is limited by the size of its reserves or the willingness of its big neighbours to help. this is what did the icelandic banks in. at that point, their balance sheet was almost 11 times gdp, with the foreign currency part constituting ⅔, or almost 7½ times gdp. and as is always the case in banking, there was a significant maturity mismatch between the asset and liability sides. compare these numbers to the reserves of the central bank of iceland, which were 21 % of gdp at the time ; a swap agreement with the nordic countries amounting to €1. 5 bn, or around 12 % of gdp ; and committed credit lines of around 2 % of gdp, or a total of around 35 %. this is dwarfed by the foreign currency liabilities of the banks, even if some of them were, of course, longer - term. these defences could only buy limited breathing space in the face of a full - scale run on cross - border operations of banks this size. further research is