The Government of Iceland issued this press release on April 12th detailing the findings of the Special Independent Investigative Commission’s Report regarding the collapse of the banking system in Iceland.
Interested persons may read an English translation of parts of the report, starting with Chapter 18: Deposits in Financial Institutions in Branches Abroad. Viewers can watch an official statement of Iceland’s “Truth Commission´s” HERE.
The following media clips review the content of the findings:
13 April 2010
‘Extreme negligence’ marks Iceland bank crisis
By Andrew Ward in Stockholm
An official report yesterday accused the Icelandic government and regulators of “extreme negligence” in the run-up to the country’s 2008 banking crisis.
Geir Haarde, former prime minister, and David Oddsson, former prime minister and central bank governor, were among those blamed for the crash.
The independent “truth commission” appointed by parliament to investigate the crisis also pointed to possible illegality within the banks, including share price manipulation and exaggeration of asset values.
The 2,000-page report marks the most in-depth account to date of how one of the world’s wealthiest economies was brought to the brink of bankruptcy in October 2008 by the collapse of its three main commercial banks.
The commission criticised regulators for failing to rein in the banks – Landsbanki, Glitnir and Kaupthing – as they grew 20-fold in size between 2001 and 2008 until their liabilities far exceeded the country’s ability to bail them out.
The Icelandic financial supervisory authority was “understaffed and lacked experience” in the face of a domestic banking sector intent on international expansion. “We gave the banks free rein to gallop around without any understanding of the incentives that were driving growth and the potential costs of a crisis,” Sigridur Benediktsdottir, one of the commission members, told the Financial Times.
All the ministers and officials censured by the commission have left office since the crisis, limiting the political fallout from the report.
Johanna Sigurdardottir, prime minister, said the “painful truths” contained in the report would help bring “closure” for the island nation of 320,000 people as it tried to rebuild its shattered economy.
“Mistakes were certainly made. The private banks failed, the supervisory system failed, the politics failed, the administration failed, the media failed and the ideology of an unregulated free market utterly failed,” she said.
The report accused the banks of lending too readily to their own owners, often with inadequate collateral. All three banks counted their owners as their biggest borrowers. Many of the loans were used to buy shares in the banks and related companies, the report added, inflating the value of the stocks. About a quarter of the three banks’ capital base was financed by their own lending.
“According to all the loan-books from the banks, all the former owners of the three banks had inappropr-iate loans from the banks,” said Ms Benediktsdottir.
A summary of the report has been handed to the Icelandic special prosecutor who is conducting a separate criminal investigation into the crisis. The report accused regulators of failing to spot the danger posed by the banks’ heavy dependence on foreign deposits for funding as they lured British and Dutch depositors into high-interest accounts such as Landsbanki’s Icesave unit.
By the middle of 2007, deposits in Landsbanki’s UK branch, which included Icesave, amounted to £5.5bn.
“In light of the fact that the foreign currency reserves of the central bank of Iceland were only £1.2bn at that time, it may be viewed as certain that the central bank would not have been able to act as a lender of last resort to Landsbanki if that proved necessary,” the report said.
The commission catalogued a series of increasingly fraught meetings between Icelandic and British officials in the run-up to the crash as UK regulators pressed Landsbanki to transfer the Icesave accounts to a UK subsidiary that would fall under the remit of the British deposit guarantee fund.
Landsbanki dragged its feet on the move – leaving Icelandic taxpayers with a €3.9bn bill for the Icesave losses.
Financial Times, 13 April 2010
Seeds of Iceland’s crisis sown years before crash
By Andrew Ward
When Sigurjón Árnason, former chief executive of Landsbanki, appeared before Iceland’s independent “truth commission” last summer, he recalled the sense of confidence that pervaded the country’s banking sector until 2008.
It had “not occurred to anyone that there was a remote chance of a collapse like that which [would] later come to pass”, he said, according to the long-awaited commission report into the Icelandic bank crash published yesterday.
It was a complacency that spread from the bank headquarters to the regulators, central bank, government and, ultimately, the Icelandic public, most of whom were happy to share in the spoils of the financial boom.
Yet the commission report – the result of a 15-month investigation by an independent panel app-ointed by Iceland’s parliament – says the warning signs should have been clear long before Mr Árnason warned the central bank in March 2008 that Landsbanki was sitting on a “time bomb”.
The seeds of crisis were laid several years earlier, when, unshackled by government liberalisation of the financial sector, Icelandic banks set out to turn their isolated Atlantic island nation into an international financial centre.
In 2005 alone, the three big banks – Landsbanki, Glitnir and Kaupthing – issued about €14bn in foreign debt securities, most of it maturing in three to five years. It was the equivalent, said Sigridur Benediktsdottir, one of the commission members, of US banks issuing $14,000bn in debt, considering the respective sizes of the two economies. Buoyed by Iceland’s triple-A credit rating, refinancing was not a problem as long as global markets were benign. But when the economic skies darkened in 2007, the banks were forced to scramble for new sources of funding.
Their solution was to open overseas branches that attracted billions of pounds and euros in deposits from foreign savers attracted by some of the highest interest rates in the market.
Foreign deposits became a crucial source of funding for the banks as the credit markets seized up, but they greatly increased the systemic risks facing the tiny Icelandic economy. By the middle of 2007, deposits in Landsbanki’s UK branch, which included the popular Icesave online bank, amounted to £5.5bn.
“In light of the fact that the foreign currency reserves of the Central Bank of Iceland were only £1.2 bn at that time, it may be viewed as certain that the Central Bank would not have been able to act as a lender of last resort to Landsbanki if that proved necessary,” the report said.
The commission catalogued a series of increasingly fraught meetings between Icelandic and British officials in the run-up to the crash as UK regulators pressed Landsbanki to transfer the Icesave accounts to a UK subsidiary that would fall under the remit of the British deposit guarantee fund. Landsbanki dragged its feet on the move – leaving Icelandic taxpayers with a €3.9bn bill for the Icesave losses.
“In seven years [before the crisis] the three banks became 20 times bigger and that is the main reason for the fall of the economy,” said Ms Benediktsdottir. The report outlined how the banks were used by their owners – known as the “Viking Raiders” – to finance the expansion of big overseas business and financial empires, including extensive investments in the UK retail sector.
“According to all the loan books from the banks, all the former owners of the three banks had inappropriate loans from the banks,” said Ms Benediktsdottir. Many of the loans were used to buy shares in the banks and related companies, the report added, inflating the value of the stocks.
About a quarter of the three banks’ equity was tied up in loans to their main shareholders before the crisis.
The Wall Street Journal 13 April 2010
Report On Iceland’s Banking Collapse Blasts Ex-Officials
A report on Iceland’s 2008 banking collapse charges that the island nation’s former prime minister and its central-bank chief acted with “gross negligence” in failing to prevent the meltdown.
The 2,300-page government-commissioned report released Monday is Iceland’s boldest attempt to come to grips with a crisis that turned it from a wealthy paragon to a cash-poor pariah on international markets.
In October 2008, all three of Iceland’s big banks — essentially the entire banking system — melted down within days. The banks had grown huge by lending extensively abroad, and when trouble struck, Iceland’s government and central bank were unprepared to bail them out.
“The private banks failed, the supervisory system failed, the politics failed, the administration failed, the media failed, and the ideology of an unregulated free market utterly failed,” Prime Minister Johanna Sigurdardottir said after the report was released.
The investigation pointed a finger at seven officials, including then-Prime Minister Geir Haarde and then-central-bank chief David Oddsson. “The Commission finds that these seven have demonstrated gross negligence in the discharge of their duties,” commission chairman Pall Hreinsson told reporters.
“They had the necessary information, but did not act accordingly, each pointing the finger at the next person,” he said. Mr. Hreinsson said a parliamentary panel would decide whether legal action would be taken against them. One of the seven, former banking minister Bjorgvin Sigurdsson, said Monday he would resign his post as parliamentary leader of the Social Democratic Alliance, though not his seat in parliament. There was no immediate response from the others. Mr. Oddsson, who is also a former prime minister, became editor of Iceland’s main newspaper, Morgunbladid, after being forced out of the central-bank job. A person answering the phone at the paper said Mr. Oddsson was away and wouldn’t return for a week. Mr. Haarde left the prime minister’s post to seek cancer treatment.
13 April 2010
Icelandic commission says ‘gross negligence’ preceded banking collapse
Report: ‘Gross negligence’ in bank oversight
A report into Iceland’s 2008 banking collapse charges that the island nation’s former prime minister and central bank chief acted with “gross negligence” in allowing the financial sector to overheat without adequate oversight. In a government-commissioned 2,300-page report, Pall Hreinsson, the supreme court judge appointed to head the commission, singled out seven former officials, including former prime minister Geir Haarde and central bank director David Oddsson, for particular criticism. Hreinsson said a parliamentary committee would consider whether legal action should be taken against the seven, which include former ministers and agency heads. Haarde said the officials had tried their best and that the banks were to blame. Prime Minister Johanna Sigurdardottir, who took over in February 2009, when Haarde’s government was ousted, welcomed the report as a reminder that Iceland needed to carry out further “rigorous reform.”
— Associated Press
13 April 2010
Iceland lifts lid on banks ‘excessive loans’ to billionaires
Iceland’s banks gave “excessive” loans to a handful of powerful billionaires, including Robert Tchenguiz, the property entrepreneur, Jon Asgeir Johannesson, the retail tycoon, and Bjorgolfur Gudmundsson, the former owner of West Ham FC, according to a damning inquiry.
Its parliamentary investigation – The Truth Report – found numerous potential cases of illegality, including possible share price manipulation and exaggeration of asset values, within the island nation’s three banks – Kaupthing, Glitnir and Landsbanki. The long-awaited report also suggests that the banks were effectively controlled by five investors wielding “unlimited influence”, with some acting as shadow directors. The report accuses the bank’s owners of pressuring management into awarding loans to their companies and friendly clients, with little or no collateral.
The UK lost £8bn in the Icelandic collapse of October 2008, and charities and councils are still waiting for £1bn in compensation. Most controversially, the Treasury bailed out 300,000 British savers with Landsbanki’s high-interest Icesave accounts, sparking a diplomatic row over the responsibility for the £2.3bn bill this produced.
It emerged in the report that companies connected to Mr Gudmundsson, whose family owned 40pc of Landsbanki, had borrowed almost as much as the entire £2.3bn Icesave debt to finance their own private investments. The loans amount to 140pc of the bank’s equity.
The report quotes Sigurjon Arnason, ex-chief executive of Landsbanki, as saying: “Resisting the requests from the owners of the banks would have equalled quitting from my position.”
The report also criticises Kaupthing’s loans to London-based property entrepreneur Mr Tchenguiz, whose companies received £1.4bn.
“We consider that Kaupthing’s loans to Robert Tchenguiz and companies have been in excess of that which could reasonably be considered a commercial assumption. Rules on large exposures were not followed,” it says. The report adds that it is “difficult to see how loans of this magnitude were taken with the bank’s interests in mind”.
Mr Tchenguiz, who owned large stakes in Sainsbury’s and Mitchells & Butlers before they were seized by Kaupthing’s winding-up committee, was not a direct shareholder. However, he sat on the board of Exista, an investment firm that owned 23pc of the bank. He denies any wrongdoing and said his loans were not against the rules.
Mr Johannesson, the former boss of failed British retail giant Baugur, a current director of House of Fraser and chairman of Iceland Foods, also comes under scrutiny for his role at Glitnir. Companies connected to Mr Johannesson, one of Glitnir’s biggest shareholders, borrowed £3.5bn.
The 2,000-page document is heavily critical of Iceland’s former ruling political party.
It says ex-Prime Minister Geir Haarde acted with “gross negligence” and reveals that former central bank manager David Oddsson turned down help from his UK counterpart Mervyn King.
The banks’ owners and key shareholders have all repeatedly denied any wrongdoing.
13 April 2010
Icelandic authorities ‘negligent’ over banking collapse
Leading Icelandic figures, including ex-Prime Minister Geir Haarde, are guilty of “negligence”, a report into the Icelandic banking crisis has said. More should have been done to limit the damage to Iceland of the collapse of its biggest banks in 2008, it said. Authorities should also have made sure UK Icesave depositors were insured by the UK, saving Iceland nearly £5bn. The scathing 2000-page report also cited evidence of possible insider trading by key Icelandic investors. It found that money had been withdrawn by “insiders” only days before the banks went bust. The matter has been referred to Iceland’s prosecution service.
The Special Investigation Commission report, which was commissioned by the Icelandic parliament, said that the collapse of the banking system, which took place in October 2008, was already inevitable by the end of 2006. In the seven years leading up to the crisis, Icelandic banks grew 20-fold in size. The Icelandic financial services regulator was overwhelmed by the growth, the report said. It was “in general understaffed and lacked experience” and did not use the legal powers available to it, according to the commission’s presentation. Prime Minister Johanna Sigurdardottir acknowledged that “mistakes were certainly made”. “The private banks failed, the supervisory system failed, the politics failed, the administration failed, the media failed, and the ideology of an unregulated free market utterly failed,” she said.
The report said that the Icelandic authorities missed important opportunities in 2008 to limit the eventual damage to Iceland from the collapse. The biggest of these missed opportunities relates to Icesave, the brand name used by Icelandic bank Landsbanki for its bank accounts in the UK and Netherlands. If the Icelandic authorities had intervened in the summer of 2008 to ensure that Icesave was turned into a subsidiary, it would have meant that Iceland was no longer liable for its nearly £5 billion in deposits, the report said. In February to April 2008, Icesave experienced a brief crisis during which some 20% of its UK deposits were withdrawn amid various press reports in the UK that the Icelandic banks were in trouble. This prompted a discussion between Icesave’s owner, Icelandic bank Landsbanki, and the UK’s Financial Services Authority (FSA) about the feasibility of turning Icesave from a branch into a subsidiary, a move that would take about six months to implement. As a branch, Icesave was legally part of Landsbanki itself – in other words Icesave depositors were handing their money directly to a bank in Iceland – whereas if it were turned into a subsidiary, it would have become a separate UK bank owned by Landsbanki. The important point for Icesave’s British depositors is that if Icesave had been a subsidiary the first £50,000 of their money would have been guaranteed by the UK’s deposit insurance scheme. However, for Landsbanki, turning Icesave into a subsidiary was less desirable because it would have meant that the cash collected from depositors by Icesave was no longer easily available for Landsbanki to use in its day-to-day business. According to the report, by late April the first spate of withdrawals from Icesave came to an end. With the emergency seemingly over, Landsbanki “changed its tune” about turning Icesave into a subsidiary, telling [UK financial regulator] the FSA that the this was now only a medium to long term objective. “I’m surprised it took the central bank so long to figure out the reason,” said Anne Sibert, economist at Birkbeck College in London, referring to Landsbanki’s apparent conflict of interest in keeping Icesave as a branch. “It seems like the authorities sat back [during the summer of 2008] while Landsbanki and the FSA went back and forth and back and forth, without anything coming from it.”
The report accuses leading Icelandic figures of negligence in failing to appreciate the systemic risk posed by Icesave to the Icelandic banking system. Among those specifically criticised are the former Prime Minister Geir Haarde, the former finance and business ministers, as well as the head of the Icelandic central bank and the head of the financial services regulator. The commission chair, Pall Hreinsson, said that a parliamentary committee would now decide whether legal action ought to be brought against those named in the report. “They had the necessary information, but did not act accordingly, each pointing the finger at the next person,” Mr Hreinsson told reporters.
The report also noted that the owners of all three of the big banks “had an abnormally easy access to loans in these banks, apparently in their capacity as owners… [and this] raises questions as to whether the lending is done at arms length”.
Anne Sibert, who now sits on the Icelandic central bank’s Monetary Policy Committee, was hired by Landsbanki in January 2008 to produce a report on the vulnerability of the Icelandic banking system. “I knew nothing about the Icelandic banking system, so I googled it. And after 10 minutes I was horrified… I realised pretty quickly that the situation was not viable”, she told BBC News.
Ms Sibert, along with husband and fellow economist Willem Buiter, said the banking system’s key weakness was insufficient reserves at the central bank to cover foreign currency liabilities, including UK depositors at Icesave. “The market realisation of this lack of reserves was exactly what would cause [the banking crisis],” said Anne Sibert.