Iceland Faces Second Wave of Bank Failures as Loan Ruling Depletes Assets
Local properties are reflected in windows at the Kaupthing Bank in Reykjavik, Iceland, on Tuesday, Oct. 7, 2008. Photographer: Arnaldur Halldorsson/Bloomberg News
A pedestrian enters the Landsbanki Islands hf headquarters in Reykjavik, Iceland on Tuesday, Oct. 7, 2008. Photographer: Arnaldur Halldorsson/Bloomberg News
Iceland’s creditor-controlled banks face a second round of failures as a court ruling depletes their capital while the government and pension funds balk at providing additional financing, according to regulators and investors.
Lenders, including the successors to failed Kaupthing Bank hf, Glitnir Bank hf and Landsbanki Islands hf, may lose as much as $4.3 billion, equal to a third of Iceland’s economy, after a June 16 Supreme Court decision banned loans indexed to foreign currencies, according to the Finance Ministry. That would push the capital of some banks below the legal minimum, said Gunnar Andersen, head of the Financial Supervisory Authority.
“We’d give them a deadline to make adjustments, about one or two months,” Andersen said in a July 9 interview in Reykjavik. “That time could be used to sell assets or raise new capital. Failing that, they’d risk losing their licenses.”
New bank closures would stall efforts to rebuild relations with investors almost two years after Iceland’s financial system collapsed. The government, which is relying on a $4.6 billion International Monetary Fund-led loan, says a second bank bailout would be a “severe blow” to its finances. Creditors, including Royal Bank of Scotland Group Plc and Credit Agricole Vita SpA, became shareholders in the banks after a state takeover in 2008.
“It goes without saying that Glitnir creditors are looking into their legal position and whether they can sue the Icelandic government,” said Arni Tomasson, head of Glitnir’s resolution committee, which represents the creditors.
Krona Plunge
Iceland’s financial crisis was exacerbated by banks that borrowed in currencies such as Japanese yen and Swiss francs to take advantage of lower interest rates, then repackaged them as kronur loans for clients. The krona has lost 39 percent against the yen and 31 percent against the franc since Sept. 15, 2008. The ruling limited borrowers’ liabilities to the principal, while lenders were left to foot the bill for currency losses.
Icelandic banks have as much as 900 billion kronur ($7.2 billion) of foreign currency loans and may have to write down their value by 40 percent to 60 percent, Finance Minister Steingrimur J. Sigfusson said July 7.
By comparison, the three biggest bank have combined equity of 340 billion kronur, said Gunnar Bjarni Vidarsson, an economist at IFS Consulting in Reykjavik, which provides research for financial companies and investors.
“If the banks have to write off 40 to 60 percent” of their foreign currency loans “they are bankrupt,” he said.
Space to Respond
Islandsbanki hf, the successor to Glitnir, has a capital adequacy ratio of 21 percent, compared with the 16 percent required by the FSA, and has accounted for writedowns on some of the assets transferred from Glitnir, the lender said.
“Altogether, this gives the bank some space to deal with the now altered position,” Glitnir said in an e-mailed response to questions. “Otherwise, the bank can’t comment on possible reactions to further court rulings.”
Opposition lawmakers today sought a meeting with parliament’s economy and trade committees to discuss the fallout of the ruling, radio broadcaster RUV said, citing lawmaker Eyglo Hardardottir. Askar Capital, a bank whose primary asset was a car loan unit, yesterday became the first company to declare itself insolvent because of the court’s decision.
The ruling coalition says its debt burden makes a bailout of the banks problematic. The government’s gross debt will peak at 110 percent of gross domestic product this year, the central bank estimates. That compares with an average of 80 percent for the European Union, which Iceland seeks to join.
‘Severe Blow’
“Nothing has been ruled out in regard to the government assisting the banks,” Economy Minister Gylfi Magnusson said in an interview today. “Although it’s neither easy nor desirable for the government to inject new equity into the banks, it’s by no means out of the question.”
Still, rescuing the banks would represent a “severe blow for the Treasury; it’s simply very unfortunate for the state to further indebt itself,” he said.
That leaves Iceland’s pension funds and international investors as the most likely sources of new capital.
While pension funds are the “only body that has the money” to recapitalize the banks, “it’s questionable whether the Icelandic banks can be considered to be a good investment,” said Hrafn Magnusson, managing director of the Icelandic Pension Fund Association.
‘Limits’
Pension funds also may be unwilling to help the state bail out the banks. “There are limits on the amounts the pension funds can lend to the government,” Magnusson said.
Iceland’s currency controls present obstacles to attracting money from overseas, said Vidarsson of IFS Consulting.
“Getting international investors to put money into Icelandic banks is highly unlikely,” he said. “Foreigners don’t seem interested in investing in Iceland.”
The banks are waiting for a separate ruling on the interest rates that apply to loans affected by the June decision. The central bank and FSA have recommended lenders be allowed to charge higher Icelandic rates instead of the contractual rates linked to the Swiss franc and Japanese yen.
NBI hf, the successor to Landsbanki, can meet minimum capital ratios if the June decision -- based on one corporate and two retail loans -- applies only to mortgage debt and if the bank is allowed to charge higher interest rates, said Chief Executive Officer Steinthor Palsson. NBI is considering how to respond if the ruling has a broader scope.
‘Uncertainty Factors’
“We’re always looking into selling assets,” Palsson said in an interview. “We’ll just have to sit down and discuss it with the FSA and the owners.”
Kaupthing’s resolution committee said July 6 it isn’t clear how the ruling will affect the bank’s successor, Arion hf.
“There are still a lot of uncertainty factors,” said Arion spokeswoman Berghildur Ebba Bernhardsdottir. “Therefore we are wary about speculating at this point in time.”
To contact the reporter on this story: Omar R. Valdimarsson in Reykjavik valdimarsson@bloomberg.net.
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