too big to fail, or too big to save? gunnar t. andersen director general & ceo financial...
TRANSCRIPT
TOO BIG TO FAIL,OR
TOO BIG TO SAVE?
Gunnar T. Andersen Director General & CEO
Financial Supervisory Authority - Iceland
credit market
securities market
pension-market
insurancemarket
4th ICAC SYMPOSIUM
HONG KONG15 -17 December
2009
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FINANCIAL SUPERVISORY AUTHORITYFINANCIAL SUPERVISORY AUTHORITY
AGENDAAGENDA
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
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ICELAND: AN ISLAND IN THE NORTH ATLANTICICELAND: AN ISLAND IN THE NORTH ATLANTIC
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ICELAND
HONG KONG
ICELAND SYNOPSISICELAND SYNOPSIS
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FOREIGN LIABILITIES OF BANKS AS MULTIPLE OF GDPFOREIGN LIABILITIES OF BANKS AS MULTIPLE OF GDP
THE ICELANDIC ECONOMY CRASH-LANDEDTHE ICELANDIC ECONOMY CRASH-LANDED
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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
FINANCIAL TURMOIL; SEPTEMBER-OCTOBER 2008FINANCIAL 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)
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Objective of takeovers by the FME: To ensure a functioning financial system
FAILURE OF 3 LARGEST ICELANDIC BANKSFAILURE OF 3 LARGEST ICELANDIC BANKS- SUPERIMPOSED ON LARGEST U.S. BANKRUPTCIES -- SUPERIMPOSED ON LARGEST U.S. BANKRUPTCIES -
Rank Firm Year TypeAssets USD bn
1 Lehman Brothers 2008 Investment Bank 691
2 Washington Mutual 2008 Savings and Loans 328
3 WorldCom 2002 Telecommunications 104
4 General Motors 2009 Auto mfg. 91
5 Kaupthing Bank 2008 Commercial/Investment Bank 83
6 CIT Group 2009 Bank Holding Company 80
7 Enron Corp. 2001 Energy Trading, Natural Gas 66
8 Conseco 2002 Financial Services Holding Co. 61
9 Landsbanki Islands 2008 Commercial/Investment Bank 50
10 Glitnir Bank 2008 Commercial/Investment Bank 49
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FAILURE OF 3 LARGEST ICELANDIC BANKSFAILURE OF 3 LARGEST ICELANDIC BANKS- SUPERIMPOSED ON LARGEST U.S. BANKRUPTCIES -- SUPERIMPOSED ON LARGEST U.S. BANKRUPTCIES -
Rank Firm Year TypeAssets USD bn
1 Lehman Brothers 2008 Investment Bank 691
2 Washington Mutual 2008 Savings and Loans 328
3 3 Icelandic Banks 2008 Commercial/Invest. Banks 182
3 WorldCom 2002 Telecommunications 104
4 General Motors 2009 Auto mfg. 91
6 CIT Group 2009 Bank Holding Company 80
7 Enron Corp. 2001 Energy Trading, Natural Gas 66
8 Conseco 2002 Financial Services Holding Co. 61
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Combined, the 3 largest Icelandic banks rank third if superimposed on the list of the largest U.S. bankrupcies
THE OMXI15 INDEX 30.8.2008 – 30.6.2009THE OMXI15 INDEX 30.8.2008 – 30.6.2009
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0
500
1000
1500
2000
2500
3000
3500
4000
4500
5000
OMXI15
The stock market lost 92% of its value in a few weeks
COMPARISON OF SYSTEMIC BANKING CRISESCOMPARISON OF SYSTEMIC BANKING CRISES
Source: Reinhart & Rogoff, “The Aftermath of Financial Crises”, 2008
ICELAND
COMPARISON OF SYSTEMIC BANKING CRISESCOMPARISON OF SYSTEMIC BANKING CRISES
Source of compiled data: Oliver Wyman
Starting dateWorst YoY Real GDP
growth, %1
Max unemployment Rate2
Change in market index, YoY %3 Fall in FX rate, %4 NPL,
% total loans5
Iceland 2008 -9.6 [2009e] 6.9 [2010e] - 91.1 [2008] -55 [2008] ~50% (est.)6
Indonesia 1997 -13.1 11.5 -37.0 -57.8 46.87
Thailand 1997 -10.5 4.6 -55.2 -31.1 30-45
South Korea 1997 -6.9 7 -42.2 -45.9 35
Norway 1988 -0.2 6 -28.9 -11.6 16.4
Sweden 1991 -1.2 9.3 15.0 -8.7 13
USA 1980 -1.9 9.7 -9.7 -8.2 4.1
1. Source: Indonesia: IMF World economic outlook Oct 2008 (only Indonesia); Others: DataStream2. 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 Composite4. Source: DataStream: USD to national currency quarterly variation, For USA GBP to USD5. Source: IMF Systemic banking Crises: A New Database Oct 20086. Oliver Wyman analysis7. Source: Bank of Indonesia
FX RESERVES OF THE CENTRAL BANK OF ICELANDFX RESERVES OF THE CENTRAL BANK OF ICELAND
AS % OF BANKS’ SHORT TERM, FX-DENOMINATED LIABILITIES
MOODY’S RATING OF ICELANDIC BANKSMOODY’S RATING OF ICELANDIC BANKS
Bank 2003 2004 2005 2006 2007 2007 2008
Glitnir A1 A1 A1 A1 Aaa Aa3 A2
Kaupthing A3 A1 A1 A1 Aaa Aa3 A1
Landsbanki A3 A2 A2 A2 Aaa Aa3 A2
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Moody’s rating system:
1. Aaa Aa A 2. Baa Ba B3. 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
CDS SPREADSCDS SPREADS
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Lehman Brothers
Kaupthing Bank
The message came in loud and clear, but nobody in Iceland wanted to listen
400 points
1000 points
ECONOMIC EXPANSION AND BOOM YEARSECONOMIC 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
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INTEREST RATE DIFFERENTIALINTEREST RATE DIFFERENTIAL
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NUMBER OF EMPLOYEES VERSUS INDUSTRY SIZENUMBER OF EMPLOYEES VERSUS INDUSTRY SIZE
Source: Seðlabanki Íslands, Q3 2008 is last available for 2008
From 2000-2008, FME staffing approximately doubled
Assets of regulated entities grew by 554% during the same period
POST-CRASH INVESTIGATIONS BY FMEPOST-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
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LOOKING AHEADLOOKING 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 (?)
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THANK YOU.
credit market
securities market
pension-market
insurancemarket
4th ICAC SYMPOSIUM
HONG KONG15 -17 December
2009