Banking on Power: Political Capitalism and Institutional Fragility in Iceland’s Banking System, 1885–2025

Iceland’s banking system has undergone repeated waves of reform: state-led development, party-based finance, liberalization, collapse, post-crisis reconstruction, and reprivatization. Drawing on Alþingi records, the report of the Special Investigation Commission, the National Audit Office’s review of the 2022 bank sale, and bank governance records, this article traces that history from 1885 to 2025 as an extreme case in which the interaction of institutions, elite networks, and legitimating frames becomes unusually visible. Combining Beckert’s triadic account of fields with Mahoney and Thelen’s modes of gradual institutional change, it shows that liberalization and privatization did not depoliticize finance but reallocated political influence to ownership structures, board appointments, and socially embedded credit relations. Reform was repeatedly absorbed rather than resisted. Only in the 2020s, under sustained external accountability, did that absorptive capacity meet its first genuine constraint. Political capitalism, the article argues, is a product of reform rather than an obstacle to it.