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19th Aug 2022

Icelandic report on the crash finds web of greed, negligence

  • PM Sigurdardottir: "free market ideology utterly failed" (Photo: Magnus Fröderberg/norden.org)

Iceland's leading politicians, bankers and regulators all engaged in acts of "extreme negligence" that predictably led to the country's financial crash in 2008, a government investigation into the banking crisis has found.

A 2,300-page report by a Special Investigation Commission of Iceland's Althingi, the north Atlantic island's parliament, published on Monday (12 April) is scathing in its criticisms notably of former prime minister Geir Haarde, the chairman of the central bank, David Oddsson (the architect of the privatisation of the banking sector in the 1990s), finance and commerce ministers, central bank governors and the chief financial regulator.

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A separate parliamentary committee is to now consider whether legal action is to be taken against those it alleges to have been responsible.

Reflecting on the findings of the "truth commission," Prime Minister Johanna Sigurdardottir said: "The private banks failed, the supervisory system failed, the politics failed, the administration failed, the media failed, and the ideology of an unregulated free market utterly failed."

The crucial conclusion of investigators is that the growth in the banking sector - 20 times its original size in the space of seven years - outstripped the country's ability to cover liabilities and regulators' ability and willingness to monitor the sector.

The central bank did not maintain sufficient foreign currency reserves, the report underscored, and the deposit guarantee fund was too tiny to cover any failure, let alone a failure by all three of the main banks - Glitnir, Kaupthing and Landsbanki.

Slamming the financial supervision authority (FME), the probe said it "did not enforce the legal provisions which were at its disposal even when they saw laws being broken."

The report also described how the largest shareholders in each of the banks were each of their institutions' largest borrowers, and "had an abnormally easy access to loans in these banks, apparently in their capacity as owners ... [raising] questions as to whether the lending is done at arms length".

Glitnir for example regularly loaned sums to investment house Baugur, and its holdings in a number of UK high-street firms. One of the bank's major stakeholders was also the owner of Baugur.

The report also will deliver some good news to the UK, long cast as a villain in its attempts to recover money lost in the collapse of Landsbanki online banking firm Icesave.

The document details how in 2008, Landsbanki and the British Financial Services Authority (FSA) held intense discussions over whether to restructure Icesave as a UK subsidiary rather than as a branch of the parent company.

Had Landsbanki gone ahead with the change, Icesave depositors would have been covered by the UK's deposit insurance scheme, letting Iceland off the hook for the billions in deposits - the source of the grievance between London and Reykjavik and a major threat to the Icelandic government's EU membership ambitions.

The report found that Landsbanki was reluctant to make the change as it would have meant that the funds deposited by customers would not be so readily available for use by Landsbanki directly.

The truth commission also found that funds from some banks had been withdrawn by "insiders" just days before the banks closed their doors, a finding that may be taken up by state prosecutors.

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