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TOO BIG TO FAIL, OR TOO BIG TO SAVE? Gunnar T. Andersen Director General & CEO Financial Supervisory Authority -

securities market. credit market. insurance market. pension- market. TOO BIG TO FAIL, OR TOO BIG TO SAVE? Gunnar T. Andersen Director General & CEO Financial Supervisory Authority - Iceland. 4 th ICAC SYMPOSIUM HONG KONG 15 -17 December 2009. FINANCIAL SUPERVISORY AUTHORITY. AGENDA.

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TOO BIG TO FAIL, OR TOO BIG TO SAVE? Gunnar T. Andersen Director General & CEO Financial Supervisory Authority -

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  1. securities market credit market insurance market pension- market TOO BIG TO FAIL,ORTOO BIG TO SAVE?Gunnar T. Andersen Director General & CEOFinancial Supervisory Authority - Iceland 4th ICAC SYMPOSIUM HONG KONG15 -17 December 2009

  2. FINANCIAL SUPERVISORY AUTHORITY

  3. 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

  4. ICELAND: AN ISLAND IN THE NORTH ATLANTIC ICELAND HONG KONG

  5. ICELAND SYNOPSIS ICELAND: Population: 320,000 Area: 103,000 square km Capital: Reykjavik GDP in 2008: USD 16.7 bn

  6. FOREIGN LIABILITIES OF BANKS AS MULTIPLE OF GDP

  7. 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

  8. 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

  9. FAILURE OF 3 LARGEST ICELANDIC BANKS- SUPERIMPOSED ON LARGEST U.S. BANKRUPTCIES -

  10. 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

  11. THE OMXI15 INDEX 30.8.2008 – 30.6.2009 The stock market lost 92% of its value in a few weeks

  12. COMPARISON OF SYSTEMIC BANKING CRISES ICELAND Source: Reinhart & Rogoff, “The Aftermath of Financial Crises”, 2008

  13. COMPARISON OF SYSTEMIC BANKING CRISES 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

  14. FX RESERVES OF THE CENTRAL BANK OF ICELAND AS % OF BANKS’ SHORT TERM, FX-DENOMINATED LIABILITIES

  15. MOODY’S RATING OF ICELANDIC BANKS Moody’s rating system: 1. Aaa Aa A 2. Baa Ba B 3. Caa Ca C Numerical modifiers are applied to each generic rating classification from Aa through Caa In early 2007, the 3 Icelandic banks were briefly assigned higher ratings than e.g. ABN Amro

  16. CDS SPREADS The message came in loud and clear, but nobody in Iceland wanted to listen Kaupthing Bank Lehman Brothers 1000 points 400 points

  17. 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

  18. INTEREST RATE DIFFERENTIAL

  19. NUMBER OF EMPLOYEES VERSUS INDUSTRY SIZE • From 2000-2008, FME staffing approximately doubled • Assets of regulated entities grew by 554% during the same period Source: Seðlabanki Íslands, Q3 2008 is last available for 2008

  20. 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

  21. 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 (?)

  22. securities market credit market insurance market pension- market THANK YOU. 4th ICAC SYMPOSIUM HONG KONG15 -17 December 2009

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