Bank-assets-to-GDP ratio, not country size, determines whether banks can be let fail

Evidence

Can we generalize from Iceland to elsewhere? After all, we previously argued that we should not generalize from the experience of the REBLLs to the much larger states of Southern Europe. So what’s different here? Although Iceland is the definition of tiny, what matters in this case is not the size of the country, or its population, but the size of the banks relative to the size of the economy, its bank-assets-to-GDP ratio. In Iceland, that ratio was nearly ten to one at the time of the bust. In the United States that ratio was just over one to one. Iceland had ten times the bust of the United States’ worst-case-ever scenario, and it not only survived, it prospered. — Mark Blyth, Austerity, 648

Categorization

• DEFINE: Clarifies bank-assets-to-GDP ratio as the operative scale variable rather than country size/population.
• XREF: connects to: Letting banks fail produced better outcomes than bailouts in 2008 — Mark Blyth, Austerity: The History of a Dangerous…, 622