3 PLANTEAMIENTO DEL TRABAJO
3.3 Procedimiento de cerramientos heterogéneos complejos
Chapter 19 describes the background of the consultative group established by the Prime Minister’s Office, the Ministry of Finance, the Ministry of Business Affairs, the FME, and the CBI (the government consultative group). As is detailed in that Chapter representatives of the above-mentioned authorities had met for consultation since January 2004, and prepared a specific memo- randum on preparedness of the government in case of possible difficulties in the financial sector. The ministers from the three mentioned ministries, representatives for the two Government authorities, together with the Minister for Foreign Affairs, were briefed on the content of the memoran- dum on 17 February 2006. The memorandum provided for a number of remedial actions, including enhanced powers for the FME. A proposal was made to formally establish a special consultative group, cf. discussion below on response to this proposal.
As mentioned earlier, several unfavourable signs had been emergin since the beginning of 2006 with regard to the Icelandic financial market. For instance, the analysis reports drawn up by foreign financial corporations, at the start of the so-called „mini-crisis“, portrayed a more negative picture of the Icelandic banks than been the case before. On 21 February 2006, Fitch Ratings changed the prognosis for the state of Iceland from stable to negative. Subsequently, the exchange rate of the krona fell dramatically as did the value of domestic stock shares. That same day, an agreement was made to establish a special government consultative group, that was inter alia entrusted with the task of discussing the status and prospects of the financial market. Despite the fact that the group had been established under circumstances where the Icelandic financial market seemed to be at risk, the group convened only twice that year, i.e. on 1 June and 30 November.
In general, it is believed that spring 2006 marked a certain turning point as regards the opinion of foreign parties towards the Icelandic financial system. In this context, the report of economists Frederic S. Mishkin and Tryggvi Þór Herbertsson, Financial Stability in Iceland, published by Iceland’s Chamber of Commerce in May 2006, has often been referred to. Following the report, things calmed down to a certain extent.
By the end of 2005, foreign credit-rating agencies and analysts had criti- cised that the Icelandic banks did not have sufficient deposits in their opera- tions. The banks responded to this criticism and decided to seek deposits in foreign markets through their branches abroad. At the beginning, this was through wholesale deposits. In October 2006, Landsbanki began to offer the so-called Icesave Internet Deposit Accounts in the UK and Kaupthing Bank began to receive deposits into their so-called Edge accounts in the bank’s Finland branch in November 2007. Later on, the bank offered these accounts in other countries, either via its subsidiaries or branches. In February 2008, Kaupthing Bank started receiving deposits in the UK via its subsidiary there, Kaupthing Singer & Friedlander. The legal status of depositors differed
depending on whether the accounts were in a subsidiary or a branch of the banks in the country in question. Subsidiaries established by the banks abroad were regarded as independent foreign legal entities, and accordingly parties to the deposit-guarantee scheme of the country in question. In the case of a branch of an Icelandic bank, foreign customers were in fact doing business with an Icelandic legal entity, and their deposits were therefore guaranteed by the Icelandic deposit-guarantee scheme. This is discussed in more detail in Chapter 17. In the UK, Landsbanki received deposits in its London branch. Accordingly, the deposits of its customers were guaranteed by the Investors’ and Depositors’ Guarantee Scheme in Iceland. The Icelandic banks offered attractive interest rates and their deposit accounts quickly became very popular, especially in the UK. At the beginning, the view was that this sec- tion of the bank’s funding had been successful. It was only in late 2007, when circumstances on the financial market in the UK deteriorated, that negative puclicity surfaced with regard to the deposit accounts of the Icelandic banks in the UK, cf. a more detailed discussion below.
21.3.2 Analysis of the Efforts of the Icelandic Authorities and
of Several Relevant Issues in the Year 2007
In February 2007, the credit-rating agency Moody’s upgraded the long-term credit rating of the three large Icelandic banks. This was done on the basis that the banks were systematically important for the Icelandic economy and that the state would support them if necessary. This rise was actually withdrawn by the agency at the beginning of April 2007. It is fair to say that the inter- national credit crunch was a turning point for the Icelandic banks. From the middle of June 2007, the exchange rate of the Icelandic krona began to fall sharply as well as domestic stock prices.
Chapter 17 describes the change in the deposits ratio in the Icelandic banks as 2007 progressed, and over 50% of all deposits originated with for- eign parties. The chapter deals with what effect this development had on the obligations of the Investors’ and Depositors’ Guarantee Scheme (TIF), which is a private foundation operating on the basis of Act No. 98/1999 on Deposit Guarantees and Investor Compensation Schemes. Iceland was obliged, in accordance with the EEA Agreement, to establish a deposit insurance scheme which would fulfil the minimum requirements of Directive 94/19/EC. When the provisions of Act No. 98/1999 are compared to the rules of the EU Directive on deposit insurance guarantee schemes, as is the case in Chapter 17.4, it seems evident to the SIC that the aforementioned minimum require- ments, in so far as they can be inferred from the said Directive, have been stipulated in the Icelandic Act. It is also clear that the Icelandic Act was, with respect to these issues, in general equivalent to legal provisions on deposit- guarantee schemes, inter alia in the other Nordic countries.
However, the SIC is of the opinion that the major change in the funding of the Icelandic banks through the raising of deposits via internet accounts from 2006 onwards, should have alerted national bodies responsible for the implementation and regulation of deposit insurance schemes in Iceland, to start the process of amending the regulation of the TIF in order to strengthen its financial position. Despite the Ministry of Business Affairs’ efforts in 2007 to revise the Act on the TIF, and despite the fact that later a committee was established for that task, the result, at the beginning of 2008, was that the
introduction of such a bill would be ill-advised due to unrest and difficulties that had surfaced in the financial markets.
In mid-August 2007, Kaupthing Bank announced that the bank planned to purchase the Dutch NIBC Bank for the sum of ISK 270 billion. As described more fully below, this was never materialised.
In September 2007, a run was made on the UK bank Northern Rock when depositors withdrew a great deal of their savings. It is safe to say that this run caused some anxiety among depositors in the UK, and this was reflected in the media coverage. By the end of February 2008, the British authorities announced that the bank would be taken over by the state. Chapter 18 describes in more detail the atmosphere at that time, cf. in particular, the media coverage of the Icesave deposit accounts of Landsbanki Íslands hf.
In September 2007, a pan-Nordic contingency exercise was implemented to test government response to a staged financial crisis. On Iceland’s behalf, the FME, the Ministry of Finance and the CBI took part. The exercise sce- nario was that Kaupthing Bank had run into difficulties and the Icelandic authorities were to assess what measures should be implemented. Amongst other things, a decision had to be made as to whether the Icelandic state would come to the bank’s rescue due to its poor capital balance. The super- visors of the exercise reported that a final decision on a response from the Icelandic authorities had deliberately not been taken.86 In the hearing before
the SIC, it was revealed that it had been decided by the Ministry of Finance and the CBI not to bring the matter to a conclusion. Baldur Guðlaugsson, Permanent Secretary of the Ministry of Finance, explained in the hearing that he had feared, if facts of the response of the Icelandic authorities had leaked out, this would adversely affect the Icelandic financial market.87 The SIC is of
the opinion that it would have been useful for the Icelandic authorities to see the exercise through, given the fact that they had to deal with similar events in autumn 2008. However, important questions concerning the government’s contingency planning were still unanswered at that time. Therefore, the SIC is of the opinion that had been misguided by the Icelandic authorities not to see the exercise through.
In the latter half of October 2007, Kaupthing Bank applied for permission to keep its books, draw up annual accounts and consolidated financial state- ments in euros as from the beginning of the business year of 2008. For more details turn to Chapter 19.
In early November 2007, it seems that doubts had been raised within the CBI concerning collateralised loans taken in the CBI by certain financial entities. In its letter to the FME on 13 November that year, the Board of Governors drew attention to the fact that, in the last CBI liquidity auction, Icebank had taken a collateralised loan of the amount of ISK 105 billion. A large part of the collateral had been securities and letters of credit issued by Kaupthing Bank and Glitnir Bank. The letter states that it could be questioned whether the scope of these Icebank transactions was in accordance with the rules the bank was obliged to follow.
86. Statement of Mr. Ingimundur Friðriksson before the SIC on 19 March 2009, p. 11. See also statement of Mr. Baldur Guðlaugsson before the SIC on 25 March 2009, pp. 13-15. 87. Statement of Mr. Baldur Guðlaugsson before the SIC on 25 March 2009, pp. 13-15.
In November 2007, Tryggvi Pálsson, Director of the Financial Stability Department of the CBI, submitted a memorandum to the Board of Governors of the CBI suggesting that the Board should establish a special working group in accordance with the Board of Governors’ Resolution No. 1097 of 24 March 2006 on Responses to a Liquidity Crisis, as it was likely that the period of uncertainty with regard to funding and standing of banks would not be short-lived. The memorandum also states that it would be beneficial if the CBI made preparations for its response in case it would need to be of assistance with regard to official statements or liquidity facilitation. Subsequently, the Board of Governors summoned the group and it met for the first time on 14 November 2007. The working group held meetings fre- quently thereafter. Equally, meetings of the government consultative group, referred to above, became more frequent around this time.
In the latter part of November 2007, Iceland’s Chamber of Commerce published a report by the economists Richard Portes and Friðrik Már Baldursson, The Internationalisation of Iceland’s Financial Sector . The report maintains that the CDS spreads on the Icelandic banks, which at the time was between 140 and 300 points, was too high and that their operation was sound.
By the end of 2007, it was evident that the Icelandic stock market had taken a downturn. Increased value of registered shares, in the first half of the year, had fallen back to their original price and even lower.