That Icelandic bank report in full

Well, not quite in full, rather all we need to know.

Behind Iceland\’s superficially booming financial markets in the mid noughties lay a financial system shot through with corruption and regulatory negligence that led inexorably to a dramatic economic meltdown 18 months ago, according to a damning truth commission report.

The 2,300-page forensic investigation, presented to Iceland\’s parliament yesterday, reserves its deepest criticisms for the island\’s three largest banks – Kaupthing, Glitnir and Landsbanki – which failed in quick succession in October 2008. The long-delayed report, produced after interviews with about 300 key players, found these banks had effectively been captured by some of their powerful majority shareholders and that the true extent of their financial vulnerability had been deliberately masked.

Among the tycoons the report claimed were favourably treated by the banks they part-owned is British property expert Robert Tchenguiz. As well as having an indirect interest in Kaupthing shares, Tchenguiz, or businesses linked to him, had been granted loans with a value equivalent to 25% of Kaupthing\’s equity by early 2008. Further overdrafts were repeatedly agreed in subsequent months, many to fund margin calls from other banks.

\”Rules about large risk exposures were not followed,\” the truth commission report found. \”Judging by data the commission has requested from Kaupthing, it is hard to see that lending, to the extent that Tchenguiz companies received it during times of liquidity crisis, was decided with the banks\’ interests in mind.\”

All most fascinating but the important point to grasp is that just about everything that people are proposing as solutions to the banking collapse had entirely bugger all to do with these banks.

This is a very old fashioned banking collapse. Lend too much money to one sector (UK retail and property for example) and lend too much to a few players in that sector and when they crater so does the bank. Rather like the secondary banking crisis of the early 70s in the UK really.

But note what was not involved. It wasn\’t derivatives that brought them low. It wasn\’t CDOs or CDSs. Wasn\’t \”toxic waste\”. Wasn\’t currency dealing, futures, options. Wasn\’t even a reliance upon wholesale money. They went out and got their deposits the old fashioned way, through retail outlets (even if those were net based).

So all those proposed solutions, divorcing the casino parts of banks from the basic bits, taxing trades, reining in currency, futures, options and other derivatives. Restricting the securitisation of loans, the Robin Hood Tax, a Tobin Tax, bankers bonus tax, higher corporation taxes on banks….all are as nothing to dealing with this problem.

This was, quite simply, bad underwriting decisions on who to lend money to. Absolutely none of the proposals on the table deal with this: the simplest and most common way that banks do implode. Lending too much money to people who don\’t pay it back.

Bonus points go for spotting finance illiterates insisting that this report absolutely proves the necessity of their preferred solution: as above, all of which wouldn\’t have made the slightest bit of difference.

9 thoughts on “That Icelandic bank report in full”

  1. but it does prove that when looking at a fast buck, a bank simply doesn’t even think about risk (and is willing to ignore internal procedures in order to do so)

    Do I get my bonus points?

  2. Tne connexion with the secondary banking crisis
    of the 70’s was too much involvement in financing property.Banks piling into property,basically land,always ends in disaster.
    Which is to say,as always: we need a stiff land value tax to make banks look elsewhere. Lehman’s bet the lot on property development outside Bakersfield.

  3. “a financial system shot through with corruption and regulatory negligence” describes Britain’s banking sector quite nicely.

    Why is the FSA only getting tough with dodgy people now, long after the fact?

    Why was so little done about liar loans?

    How did Northern Rock get away with so little supervision?

    DBC Reed,

    Why did banks pile into property?

    Instead of making property less attractive wouldn’t it be better to make other investments more attractive?

    William,

    Banks (and bank regulators) believed CDOs moved risk away from banks. Regulators mistakenly believed that banks would create some risk, spread it around and then not create any more risk. Banks will *always* work to the limits because that is where profits are made, so shoveling risk out of the banking sector allowed banks to make more risk to replace it.

    The regulatory system turned banks into risk generating machines. So long as it could be handed off to someone else the banks would keep creating it. It’s not that they were ignoring the risk – they were producing a product investors wanted to buy off them.

  4. The obvious regulatory response to problems of this sort is a few salutary hangings, pour encourager les autres.

  5. I´m afraid dearieme is absolutely correct. The Icelandic system collapsed because of old fashioned corruption brought about by even more old fashioned greed and venality. There is F all you can to legislate that out of the human character but you can make following your most basic instincts very very expensive in personal terms by making those you catch pay a heavy price.

  6. ^^What you can do is *regulate the financial system*. It’s a radical idea, I know, but it just may be worth experimenting with some full on Marxist-Leninism for a change. Hell, someone even told me that back before we liberalised finance, we didn’t even have that many famines.

  7. DBC Reed’s leftish nonsense ignores the point that the only losers from taxes aimed at banks are bank customers. And that banks can easily get round any such smeasures proposed by Treasury simpletons by creating property trusts and funds etc.

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