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TOO BIG TO FAIL,
OR
TOO BIG TO SAVE?
Gunnar T. Andersen
Director General & CEO
Financial Supervisory Authority - Iceland
securities
market
credit market
pensionmarket
insurance
market
4th ICAC
SYMPOSIUM
HONG KONG
15 -17 December 2009
FINANCIAL SUPERVISORY AUTHORITY
2
AGENDA
Iceland Synopsis
 Growth of financial sector
 Collapse of banks and financial turmoil
 The challenge to authorities

 Financial Supervisory Authority – Iceland
 Investigations and sanctions

Looking forward
3
ICELAND: AN ISLAND IN THE NORTH ATLANTIC
ICELAND
HONG KONG
4
ICELAND SYNOPSIS
5
FOREIGN LIABILITIES OF BANKS AS MULTIPLE OF GDP
THE ICELANDIC ECONOMY CRASH-LANDED
A crash-landing became
unavoidable at the end of 2008 in
the wake of the collapse of the
three largest commercial banks
and other financial entities
7
FINANCIAL TURMOIL; SEPTEMBER-OCTOBER 2008

The FME took control of:
 Landsbanki Íslands hf.
 Glitnir bank hf.
 Kaupthing bank hf.
 Straumur Investment Bank

The FME intervened in:
 Sparisjódabanki Íslands hf. (Icebank)
 Reykjavík Savings Bank (Spron)
Objective of takeovers by the FME:
To ensure a functioning financial system
8
FAILURE OF 3 LARGEST ICELANDIC BANKS
- SUPERIMPOSED ON LARGEST U.S. BANKRUPTCIES Assets
USD bn
Firm
Year
Type
1
Lehman Brothers
2008
Investment Bank
691
2
Washington Mutual
2008
Savings and Loans
328
3
WorldCom
2002
Telecommunications
104
4
General Motors
2009
Auto mfg.
91
5
Kaupthing Bank
2008
Commercial/Investment Bank
83
6
CIT Group
2009
Bank Holding Company
80
7
Enron Corp.
2001
Energy Trading, Natural Gas
66
8
Conseco
2002
Financial Services Holding Co.
61
9
Landsbanki Islands
2008
Commercial/Investment Bank
50
Glitnir Bank
2008
Commercial/Investment Bank
49
Rank
10
9
FAILURE OF 3 LARGEST ICELANDIC BANKS
- SUPERIMPOSED ON LARGEST U.S. BANKRUPTCIES Combined, the 3 largest Icelandic banks rank third if
superimposed on the list of the largest U.S. bankrupcies
Rank Firm
Year
Type
Assets
USD bn
1
Lehman Brothers
2008
Investment Bank
691
2
Washington Mutual
2008
Savings and Loans
328
3
3 Icelandic Banks
2008 Commercial/Invest. Banks
182
3
WorldCom
2002
Telecommunications
104
4
General Motors
2009
Auto mfg.
91
6
CIT Group
2009
Bank Holding Company
80
7
Enron Corp.
2001
Energy Trading, Natural Gas
66
8
Conseco
2002
Financial Services Holding Co.
61
10
THE OMXI15 INDEX 30.8.2008 – 30.6.2009
5000
4500
4000
3500
3000
2500
2000
1500
1000
500
0
OMXI15
The stock market lost 92% of its value in a few weeks
11
COMPARISON OF SYSTEMIC BANKING CRISES
ICELAND
Source: Reinhart & Rogoff, “The Aftermath of Financial Crises”, 2008
COMPARISON OF SYSTEMIC BANKING CRISES
Starting date
Worst YoY Real GDP
growth, %1
Max unemployment
Rate2
Change in market
index, YoY %3
Fall in FX rate, %4
NPL,
% total loans5
Iceland
2008
-9.6 [2009e]
6.9 [2010e]
- 91.1 [2008]
-55 [2008]
~50% (est.)6
Indonesia
1997
-13.1
11.5
-37.0
-57.8
46.87
Thailand
1997
-10.5
4.6
-55.2
-31.1
30-45
South Korea
1997
-6.9
7
-42.2
-45.9
35
Norway
1988
-0.2
6
-28.9
-11.6
16.4
Sweden
1991
-1.2
9.3
15.0
-8.7
13
USA
1980
-1.9
9.7
-9.7
-8.2
4.1
1. Source: Indonesia: IMF World economic outlook Oct 2008 (only Indonesia); Others: DataStream
2. Source: Thailand: National Statistical Office of Thailand; Others: DataStream
3. Source: DataStream – UK: FTSE All Share, Norway: MSCI Norway, Sweden: MSCI Sweden, Thailand: Bangkok S.E.T:, Korea: Korea SE Composite,
Indonesia: Jakarta SE Composite, USA: S&P 500 Composite
4. Source: DataStream: USD to national currency quarterly variation, For USA GBP to USD
5. Source: IMF Systemic banking Crises: A New Database Oct 2008
6. Oliver Wyman analysis
7. Source: Bank of Indonesia
Source of compiled data: Oliver Wyman
FX RESERVES OF THE CENTRAL BANK OF ICELAND
AS % OF BANKS’ SHORT TERM, FX-DENOMINATED LIABILITIES
MOODY’S RATING OF ICELANDIC BANKS
Moody’s rating system:
1. Aaa
2. Baa
3. Caa
Aa
Ba
Ca
Bank
A
B
C
Numerical modifiers are applied to
each generic rating classification
from Aa through Caa
2003
2004
2005
2006
2007
2007 2008
Glitnir
A1
A1
A1
A1
Aaa
Aa3
A2
Kaupthing
A3
A1
A1
A1
Aaa
Aa3
A1
Landsbanki
A3
A2
A2
A2
Aaa
Aa3
A2
In early 2007, the 3 Icelandic
banks were briefly assigned
higher ratings than e.g. ABN Amro
15
CDS SPREADS
The message came in loud and clear, but
nobody in Iceland wanted to listen
Kaupthing Bank
Lehman Brothers
400
points
1000
points
16
ECONOMIC EXPANSION AND BOOM YEARS
 GDP grew by 130% 2000 - 2007
 Stock market index grew by 174% 2004 - 2007
 Housing prices rose by 74.4% 2004 - 2008
 Disposable income grew by 73% 2000 - 2007
 Unemployment around 1% for most of the 1998- 2008 period
 Assets of regulated entities grew by 554% 2000 - 2008
17
0
Nov…
Jul/…
Mar…
Nov…
Jul/…
Mar…
Nov…
Jul/…
Mar…
Nov…
Jul/…
Mar…
Nov…
Jul/…
Mar…
Nov…
Jul/…
Mar…
Nov…
Jul/…
Mar…
Nov…
Jul/…
Mar…
Nov…
Jul/…
Mar…
Nov…
15
Jul/…
20
Mar…
Nov…
25
Jul/…
Mar…
Nov…
Jul/…
Interest Rate, %
INTEREST RATE DIFFERENTIAL
Icelandic and U.S. Interest Rates 1998 - 2009
Fed Funds Overnight Rate
Icelandic Central Bank
Overnight Loan Discount Rate
10
5
18
NUMBER OF EMPLOYEES VERSUS INDUSTRY SIZE
70
60
8,000,000
Number of FME
Employees
Assets Under
Regulation, m. ISK
50

From 2000-2008,
FME staffing
approximately
doubled

Assets of regulated
entities grew by
554% during the
same period
7,000,000
6,000,000
5,000,000
40
4,000,000
30
3,000,000
20
2,000,000
10
1,000,000
0
0
2000 2001 2002 2003 2004 2005 2006 2007 2008 2009
Source: Seðlabanki Íslands, Q3 2008 is last available for 2008
POST-CRASH INVESTIGATIONS BY FME

Investigations have turned up some long-running
breaches of the law
 Cases under investigation involve widespread fraud
stretching back for much of this decade
 Market manipulation, insider trading, falsified reports
 In some cases, fraud appears to have been so prevalent
as to have become normal business practice
 Fraud was perpetrated against the investing public, against the country
as a whole, and against international lenders and bondholders

The banking crisis in Iceland merely intensified in October 2008
 The crisis was well underway by the middle of 2006.
 The groundwork for the crisis was laid years before 2006, at the end of
the previous decade
20
LOOKING AHEAD






Stepped-up supervision
 On-site inspections
More forceful regulatory actions
Greater deployment of IT
Higher level of international cooperation
New skills added to toolkit
 Forensic accounting
New provisions in law
 Wider authority in dealing with bad practices
 Separation of commercial banking and investment banking (?)
21
THANK YOU.
securities
market
credit market
pensionmarket
insurance
market
4th ICAC
SYMPOSIUM
HONG KONG
15 -17 December 2009