Már Guðmundsson: The financial crisis in Iceland and the fault lines in cross-border banking Speech by Mr Már Guðmundsson, Governor of the Central Bank of Iceland, at FIBE, Bergen, 7 January 2010. *  *  *  It gives me great pleasure to be here in Bergen this morning to give an address on the financial crisis in Iceland, and I would like to take this opportunity to thank the organisers for inviting me to do so. You call this session Icelandic mysteries. At this juncture, this is a more apt phrase than you might think. We are currently waiting for the findings of a parliamentappointed committee that has been working hard for over a year, collecting evidence and analysing the causes of the financial crisis in Iceland. The committee is due to release its report in early February, and we hear the report and supporting material will be well in excess of a thousand pages. We know how the Icelandic banks failed in the autumn of 2008 and can identify some of the key vulnerabilities that led to their demise. However, some important pieces of the puzzle are still missing, in particular regarding the governance and risk management of the banks, on the one hand, and the Icelandic authorities’ crisis management and interaction with their counterparts in other countries, on the other. So what I will present here today is unavoidably a partial picture. 1 You could say that it is just as well, for this is a complex saga with many twists.
Capital adequacy ratio  Capital adequacy and funding duration for some selected banks in March 2008 12 Kaupthing  11,5 11  Glitnir  10,5  Landsbanki Handelsbanken  10 DnB NOR 9,5 Intesa Sanpaolo  Swedbank 9 8,5 1  2  3  4  5 6 7 8 9 Remaining time to maturity of issued securities  Sources: Bloomberg, Riksbank. BIS Review 9/2010  9  A great deal of value is lost at the very moment when banks stop being going concerns. However, low estimated recovery rates after the banks’ collapse seem to indicate the existence of an underlying solvency problem. It also raises questions about the quality of accounting. This is one of the mysteries that still wait to be solved. My list of causes for the collapse of the Icelandic banks is the following: •  Large foreign-currency balance sheets with significant maturity mismatches but without a LOLR. •  Size relative to the home base (country and currency). •  Fatal flaws in the EU financial architecture. •  Bad and non-cooperative crisis management across interested jurisdictions. But there were also triggers and contributing factors: •  The international financial crisis and all the usual suspects that have been named in relation to it, including incentive systems, regulation and supervision. •  Flaws in business models and risk management. •  Iceland’s large macroeconomic imbalances. •  Domino vulnerabilities in Iceland’s financial sector (e.g., cross-ownership, connected lending, large exposures across institutions). •  Bad governance and accounting?