**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.
Missed opportunity
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In February to April 2008, Icesave experienced a brief crisis during which some 20% of its UK deposits were withdrawn amid various press reports in the UK that the Icelandic banks were in trouble.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 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 the FSA that the this was now only a medium to long term objective.
Landsbanki chief executive Sigurjon Arnason noted in his testimony to the committee that prior to 2008, it had “not occurred to anyone that there was a remote chance of a collapse like that which [would] later come to pass.”
Negligence
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 £5 billion in deposits.
Among those specifically criticised are the former Prime Minister Geir Haarde, the former finance and business ministers, as well as the heads of the Icelandic central bank and the financial regulator.This article is from the BBC News website. © British Broadcasting Corporation, The BBC is not responsible for the content of external internet sites.