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Iceland Lenders Still Face Risks and Uncertainty, Watchdog Says

Oct. 24 (Bloomberg) -- Iceland’s banks, the state-created successors of failed lenders Kaupthing Bank hf, Glitnir Bank hf and Landsbanki Islands hf, face risks and uncertainties only four years after their creation, according to the island’s Financial Supervisory Authority.

The three banks collapsed in a matter of days in October 2008, leaving bondholders struggling to recoup $85 billion in debt. The failure prompted the island to seek a $4.6 billion bailout led by the International Monetary Fund. Iceland completed a 33-month IMF program in August last year.

“There are certain factors which may create uncertainty and have a negative impact on their operating results,” the financial watchdog said in an annual report posted on its website today. The primary uncertainty factors relate to the lenders “loan portfolios, legal uncertainty regarding loans in foreign currencies, long-term financing, instability in foreign markets and uncertainty related to the anticipated removal of capital controls.”

Following the 2008 failure of the three banks, the country’s government stepped in and moved domestic accounts into the state-created Arion Bank hf, Islandsbanki hf and Landsbankinn hf. Kaupthing creditors were later handed an 87 percent stake in Arion, while creditors of Glitnir received a 95 percent stake in Islandsbanki. The government holds 81.33 percent in Landsbankinn, while the creditors own the remaining shares in the state-created offshoot.

“Another matter which is cause for concern is the banks’ high cost ratios by an international comparison,” according to the report. That high ratio “indicates that the banks have a considerable room for streamlining their operations.”

To contact the reporter on this story: Omar R. Valdimarsson in Reykjavik valdimarsson@bloomberg.net.

To contact the editor responsible for this story: Jonas Bergman at jbergman@bloomberg.net.

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