Icelandic banks in precarious position in early 2006

There is a very significant report attached here dating from April 2006, by Barclays Capital, on the three Icelandic banks. In my view the report contains a surprising number of facts that relate directly to the possibility of what has actually happened.

Just two examples here...
Page 6 - On understanding the risks: we still feel nervous; no change
Page 9 - International Subsidiaries do not help in distress

I found it as a result of reading someone's post on Icenews. That post is shown below, effectively a synopsis of the Barclays report, and is itself a reply to a previous reader's input.

Ostensibly, given the timescale of 2.5 years ago, and the clarity with which the financial industry has written on the Icelandic issue, it says one thing to me: Derbyshire Building Society were responsible for the mess its former IOM customers are in today.

"Nov 9, 2008, EEA/EU Lawyer said: David - you have no idea what you are talking about. Landsbanki operated in the UK under licence from the Icelandic authorities: the FME and Seðlabanki. The UK would have been prosecuted - rightly and successfully - if it had denied a legally formed financial company supervised by a Central Bank of a fellow EEA/EU country from opening branches and taking deposits in the UK. It would have been deemed discrim[in]atory and contrary to the principles of the open market.

The issue is that Landsbanki was using those overseas deposits to offset its loss of liquidity in Iceland. This was an example of the poorly regulated financial system in Iceland - such an accounting trick, while not illegal, does not conform to accepted accounting standards. This was explained to Landsbanki (and the other two banks and Seðlabanki, and Geir Haarde - who was present) at a meeting in London held at the end of March 2006. They were all told that while the banks might legally - within Iceland - book those deposits against their Icelandic balance sheets this was in fact a complete fallacy. No sovereign (in the jargon) would countenance those deposits being moved out of their jurisdiction. In times of stress they were told such deposits would be frozen. That is exactly what Sweden, Holland, the UK, Belgium, Germany etc etc did.

At that same meeting Barclays Capital advised the Icelandic authorities to require the Icelandic banks to publish UNconsolidated accounts which showed the breakdown of the balance sheet country by country. The Icelandic authorities refused since this would have revealed that the three banks were already close to bankruptcy. From early 2006 onwards liquidity for the three banks began to dry up. To plug those holes they took more and more deposits. Hence the final disaster. The fault lies entirely within the realm of the Icelandic regulatory sphere - the government for p[a]ssing such poor financial legislation (a government which was elected by the individual Icelanders - so they are ultimately responsible) and the Seðlabanki for its arms-length operations. The FME has some excuse since it was given very few powers and had little real supervisory control."