Central Bank of Iceland Had Prepared for Crisis Skip to content

Central Bank of Iceland Had Prepared for Crisis

The Central Bank of Iceland sought the advice of financial crisis expert Andrew Gracie February 27-29, 2008 and prepared a “first aid” strategy on how to react to the imminent difficulties of the banks to refinance themselves, as revealed this week.

Davíd Oddsson, former Central Bank governor and chairman. Copyright: Icelandic Photo Agency.

Former Central Bank governor and chairman Davíd Oddsson mentioned Gracie’s visit in an interview on RÚV’s news magazine Kastljós on February 24 this year, Morgunbladid reports.

“We [the Central Bank governors] asked, for example, the best financial stability export in Europe to work on a contingency plan for us in February. In this plan we assumed that the banking system would collapse in October […]. We submitted this report to the national government,” Oddsson said in the interview.

Gracie has worked on contingency plans for the Bank of England and later established his own company on contingency matters, Crisis Management Analytics, which was hired to execute a crisis management exercise of Nordic central banks, financial supervisory authorities and finance ministries, held in September 2007.

In his work for the Central Bank of Iceland, Gracie determined, among other items, that if everything would go the worst possible way, the share of the owners would have to be reduced and the banks nationalized, as was supposed to be undertaken in the case of Glitnir Bank in September last year.

Gracie presented his conclusion to the Central Bank board of directors and in March it was presented to representatives of the Prime Minister’s Office and the Ministries of Finance and Business Affairs. The meeting was also attended by the director of the Financial Supervisory Authority and representatives of the Central Bank.

This group undertook various preparations, for example for a legislation which was passed as emergency law after the banks collapsed last fall. Morgunbladid has not been granted access to this information until now.

When asked whether the Central Bank had heeded Gracie’s proposals, Tryggvi Pálsson, managing director of the bank’s financial department who hired Gracie, commented:

“There are varied opinions on what was done and whether enough was done,” adding that it is the responsibility of the investigation committee to determine that. “But I state that Andrew Gracie’s consulting helped. Although the ‘first aid’ work couldn’t have prevented the collapse, it did help reduce the damage.”

Click here to read more about the emergency law.

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