Iceland bank meltdown under microscope

Icelandic authorities should have
made sure UK Icesave depositors were insured by the UK, a report has found.

The scathing report accused leading
Icelandic figures, including ex-PM Geir Haarde and the former head of the
central bank, of “negligence”.

More should have been done to limit
the damage to Iceland of the collapse of its banking system in October 2008.

The “Special Investigation
Commission” report had been commissioned by the Icelandic parliament.

The report says that the collapse
of the Icelandic 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, the Icelandic banks grew 20-fold in size, meaning that the
Icelandic regulatory authorities no longer had the capacity to provide the
necessary regulatory oversight to the banks.

But the report also says 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.

In February to April 2008, Icesave
experienced a brief crisis during which some 20 per cent of its UK deposits
were withdrawn amid various press reports in the UK that the Icelandic banks
were in trouble.

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 the FSA that the this was now only a medium to long term

The report goes onto accuse leading
Icelandic figures of negligence in failing to appreciate the systemic risk
posed by Icesave to the Icelandic banking system.

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 $7.7 billion in deposits.