In the passage from a small-scale, low hazard sedimentation money banking system to a cosmopolitan international banking system oriented toward bad leveraged investings and depending to a great extent on foreign sweeping funding was accomplished in less than a decennary. The three taking Bankss, Glitner, Kaupthing, and Landsbanki, were among the fastest turning fiscal establishments in the universe ( Eggertsson and Herbertsson, 2009 ) . As the domestic economic system had grown and stock monetary values had soared, the three Bankss ‘ assets had expanded from “ 100 per centum GDP in 2004 to 923 per centum at terminal 2007 ” ( IMF,2008 ) which is about 10 times the state ‘s GDP. Early October 2008, the Icelandic economic euphory was crushed by the three big Bankss ‘ failures, conveying down the fiscal system, making an economic crisis, societal and political pandemonium.
The intent of this Report is to react to the issue as a regulator for Bankss, on the prostration of the Icelandic banking system by
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Identifying the chief causes of the prostration of the Bankss.
Recommending prudential ordinances which will protect the community from such lay waste toing bank failures in the hereafter.
The failure towards the three big Bankss, efficaciously taken over the authorities placed a load of debt on citizens.
II. Main causes of the prostration of the Bankss
Growth of Banks and size at the clip of prostration
The chief account on the prostration of the three big Bankss, Glitner, Kaupthing, and Landsbanki is extremely due to the rapid enlargement and their subsequent size when they fell in October 2008. Internal growing of the bank was due to the addition in loan portfolios, averaged of about 50 % from the beginning of 2004 until their prostration ( Althingi, chapter2,2009 ) ; normally associated with hapless quality loans as a consequence of hapless underwriting, record maintaining, direction and supervising ( Flannery,2009 ) . The quality of the loan portfolios were eroded under these fortunes as such large-scale and high hazard growing were non compatible with the long-run involvements of solid Bankss where there were strong inducements for growing within the Bankss.
Foreign operations of the Bankss rocketed and a alteration in the nature of the Bankss ‘ activities were besides seen as investing banking gained importance as portion of their operations. An gap of planetary debt funding further drove the growing of the Bankss. The Bankss received high recognition evaluations ; inherited from the county ‘s autonomous debt evaluation on the sound place of the province and outlooks. They besides had entree to the markets in Europe due to the European Economic Area Agreement ( EEA ) , to take part in a European Union ‘s individual market without a conventional EU rank. Such large growing in loaning by the Bankss will do their plus portfolio to develop into a really bad one ( Jimenez,2006 ) .
As the liquidness crisis started in 2007, foreign sedimentations and short term securitised support became the chief beginning of support for the three Bankss and these type of funding were really sensitive to market conditions. A tally on the collateralised loans was every bit damaging as a tally on foreign sedimentation histories. The likeliness of tally therefore additions, both on sedimentations and other agencies of support. At the clip of the prostration, repayment agenda of outstanding bond issues and indirect loans were onerous due to the tremendous growing throughout the decennary.
As a consequence of the copiousness of supply of recognition with low involvement rates in the international markets, the Bankss were able to borrow more money at low involvement rates and passed in on to its clients.
The economic resources that the Bankss had were invested into its ain portions and were known as “ weak equity ” . It consisted of loans with collaterals and frontward contract on ain portions. It was reported that these three Bankss have financed themselves with 300 billion of Iceland Kro na ( IKR ) of their ain portions in mid-2008 ( Althingi, chapter21, 2009 ) . Hence, the bank capital ratios did non reflect in the existent ability of the Bankss in defying losingss if it were to go on.
Leveraging of the bank ‘s proprietors
The proprietors of the big three Bankss were amongst the biggest borrowers ( Althingi, chapter21,2009 ) . As proprietors, they had easy entree to the loans and received significant installations though Bankss ‘ subordinates that operated money market financess. The largest debitors of Glitner, Kaupthing and Landsbanki were besides the principal proprietors of the Bankss. The operations of the Bankss were in many ways characterised by their maximising of the benefit of bulk stockholders, who held the reins in the bank, instead than by running dependable Bankss with the involvements of all stockholders in head and to demoing due duties towards creditors.
There is a struggle of involvement between the operation of the Bankss and operation of other companies owned by the same proprietors. When in the late 2007 and 2008, where the Bankss began to see support jobs, it seemed that the boundaries between the involvements of the Bankss and the involvements of their biggest stockholders were frequently ill-defined and the Bankss were seen to set more accent on endorsing up their proprietors alternatively. ( Moore, 2010 ) . The denationalization of the Bankss were owned and controlled by three groups of investors who used the Bankss to widen their balance sheet, and non by running the bank faithfully and responsibly towards the involvements of all stockholders.
Concentration of hazards
Hazard variegation is critical in the operation of the Bankss. As the Bankss are heavy indebted, it is hence of import for their portfolio of assets to be widely dispersed. As the largest debitors of the three Bankss are besides the chief proprietor of the Bankss, there is a high hazard such that the public presentation of the bank is dependent upon the public presentation of the group. It is excessively much hazard for a bank to manage as the group falls and in the event when more loans is given, proven to be harmful to the depositors and creditors if they default.
There was the exposure of more than one related party which accumulated within single Bankss in the state and besides between Bankss as there were groups of interconnected borrowers within all the Bankss. As a effect, systemic hazard exposure became important to the loan portfolios of the Bankss. The loan of the groups amounted up to 5.5 billion EUR, 11 % of all the loans and about an aggregative equity of 53 % . ( Althingi, chapter21,2009 ) This important systemic hazard does non merely impact one of the Bankss if it fails but all three Bankss.
III. Recommendations on prudential ordinances to protect community from future bank
Keeping up in gait with the monitoring on fiscal establishments
As the Bankss pursued rapid international growing and domestic enlargement, it is critical that FSA is able to maintain up to day of the month with the rapid growing of the Bankss and be good equipped with proficient expertness and the equipment necessary to bring forth high quality comprehensive studies of the place in the development of single fiscal establishments. It was clearly seen from the FSA ‘s budget up to 2006 that it was deficient for it to maintain gait with the growing ( Althingi, chapter 2,2009 ) and therefore unable to carry through its undertakings decently. Vast adept cognition is required on the operations of Bankss, economic sciences, accounting, and statute law, particularly for state has minimum experience in the fiscal industry.
The Depositors ‘ and Investors ‘ Guarantee Fund ( DIGF ) needed strong surveillance under the FSA as an insufficient amount and the possible losingss to foreign depositors will take to serious jobs. In closely supervising the fiscal establishments and its activities, prompt actions should be exercised when growing is excessively rapid to cut down the size of the balance sheets of the Bankss, where the banking system will go far excessively large in comparative to the size of the economic system.
There should be a stricter ordinance into the systemic hazard direction on the capital modesty in the fiscal establishment and besides a compulsory eventuality program as to defy a fiscal daze within the company. These eventuality programs are to be clear and realistic. A rigorous act on minimal equity capital of Bankss should besides be placed on these establishments. In the event of the failure in 2008, the regulations were based on the “ alleged ” Basel II criterions and supply that the capital base of Bankss should ever widen more than 8 % of the hazard base. However, during the clip where the fiscal system tumbled, capital ratios did non reflect the existent strength as it ain portions that risks exposure through direct collaterals and frontward contracts on their ain portions ( Althingi, chapter21,2009 )
More sectors to place specific hazards
It is of import that there is compulsory of university grade, extended cognition and experience in fiscal market in engaging competent staff. With the resources and expertness, the organizational structured can be changed to integrate groups of experts from different units who examine specific hazards ( including market hazards ) across sectors ( Jannari, K. ,2009 ) . A section for solvency and capital adequateness, section of recognition and market hazards can be introduced on top of the current four units. This can decrease the danger of compartmentalization of the supervisory authorization along the industry lines and allow regulators to concentrate on its ain supervisory undertakings.
Maximise the sum of portions that can be owned by the debitor, Cross-ownerships
Supervision in cross-ownerships has to be tighter and regulations more rigorous. The fact that Bankss were financing purchases of their ain Bankss ‘ portions by their proprietors and other clients poses a big indirect hazards in each other ‘s portions ( Jannari, K. ,2009 ) . This is particularly true for a little economic system. Cross-ownership is difficult to avoid in the absence of a comprehensive regulative and supervisory model. Therefore close supervising is critical in the instance of any methods used to hike their capital adequateness unnaturally.
In the aftermath of a blemished procedure of denationalization, together with deficient experience in the fiscal industry ; the rapid growing of the three Bankss, Glitner, Kaupthing, and Landsbanki in a short period of clip was deemed merely possible by using weak underwriting criterions, loans to big keeping companies and trusting on “ weak equity ” . The autumn of these three Bankss resulted in some of the biggest bankruptcies of all time. Preliminary estimations indicate that creditors might hold lost around 70 billion dollars in the crisis ( Eggertsson and Herbertsson, 2009 ) and about approximately $ 330,000 for every Icelandic adult male, adult female and kid ( Lewis,2009 ) .
The failure and the prostration of these Bankss as a consequence of these wickednesss have caused a important load to the Icelandic citizens. A alteration in the organizational construction of the prudential ordinances is to be implemented, in order to forestall and protect the community from such lay waste toing bank failures in the hereafter.
Aliber, R.,2008, Monetary Turbulence and the Icelandic Economy, University of Iceland, June 20, 2008.
hypertext transfer protocol: //www.hi.is/files/skjol/icelandlecutre-May-2008.pdf
Althingi,2009, Chapter 2: Summary of the Report ‘s Main Conclusions, Report of the Special Investigation Committee to the Icelandic Parliament
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Buiter, W.,2008, The Icelandic banking crisis and what to make about it: The loaner of last resort theory of optimum currency countries, Centre for Economic Policy Research, Policy insight No. 26. , October 2008.
hypertext transfer protocol: //www.cepr.org/pubs/PolicyInsights/PolicyInsight26.pdf
Eggertsson, T. and Herbertsson, T. 2009, System Failure in Iceland and the 2008 Global Financial Crisis, University of Iceland & A ; University of Reykjavik, June 10, 2009.
Flannery, M. 2009, Iceland ‘s Failed Banks: A Post-Mortem, University of Florida, November 9, 2009.
International Monetary Fund, 2008, Iceland: Fiscal System Stability Assessment-Update, December 2008.
Jannari, K. , 2009, “ Report on Banking Regulation and Supervision in Iceland: yesteryear, present and future ” , March 30, 2009.
hypertext transfer protocol: //www.island.is/media/frettir/KaarloJannari % 20_2009_ % 20Final.pdf
Jimenez, G. , J. Saurina,2006, Credit Cycles, Credit Risk, and Prudential Regulation. “ International Journal of Central Banking 2, February 2006, pages 65-98.
Lewis, Michael, 2009, Wall Street on the Tundra, Vanity Fair Magazine, April 1, 2009.
Moore, J.,2010, Iceland was ‘negligent ‘ over banking prostration, The independent, April 13, 2010.
hypertext transfer protocol: //www.independent.co.uk/news/business/analysis-and-features/iceland-was-negligent-over-banking-collapse-1943153.html