Page last updated at 16:35 GMT, Monday, 12 April 2010 17:35 UK

Icelandic authorities 'negligent' over banking collapse

Icesave's parent bank, Landsbanki, collapsed in 2008

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 from 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It found that money had been withdrawn by "insiders" only days before the banks went bust.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 financial services regulator] was... understaffed and inexperienced
Special Investigation Commission presentation on its report

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.

Missed opportunity

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.

Pall Hreinsson
They had the necessary information, but did not act accordingly, each pointing the finger at the next person
Pall Hreinsson, Special Investigation Commission chairman

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.

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