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Supervisory Institutions Failed

From the conclusions of the Parliamentary committee in its report published September 11, 2010:

The Parliamentary committee believes that supervisory institutions have failed. There was great inclination to interpret the regulatory options narrowly and not to use them. It was hardly known that supervisors came to the offices of the institutions for inspection, … and regulators had little or no feeling for the underlying risk in the banking system. The banks could easily do as they pleased and could bypass regulations and government and serious fraud was sometimes not referred to prosecutors.

In happier times. David Oddsson, former Prime Minister and Central bank director, Björgólfur Gudmundsson, Chairman and owner of Landsbanki and former Prime Minister Geir Haarde.

From the report of the Investigative committee of Althingi it is clear that the work of public accountants was faulty in many ways. It is the opinion of the Parliamentary committee that inner supervisors for shareholders and financial affairs of the banks have failed in their supervisory duty and are greatly responsible for what happened. Bad business habits of the banks and disrespect for law and regulations were allowed for as long as they did because of this. It is also serious that public accountants do not seem to have discussed the economic downfall and its consequences within their ranks.

The Parliamentary committee criticizes the fact that no evaluation on behalf of Icelandic regulatory agencies on how the Icelandic banks were financed and what risks might be involved for the Icelandic financial system. The Parliamentary committee is especially critical of the fact that Iceland’s Central Bank and the Financial Supervisor did not call for formal preparations for the transfer of foreign deposit accounts from a branch to a subsidiary.

The Parliamentary committee strongly criticizes the decision of the Central Bank directors in April 2008 of not accepting assistance for Icelanders to reduce the banking system. That spring it was the opinion of foreign central bank director’s that the size of the problems of the Icelandic banks was such that it would not be solved by assistance from foreign banks. The only solution would be to get the assistance of the International Monetary Fund and reduce the size of the banking system.

The Parliamentary committee criticizes the Central Bank for giving loans without sufficient collateral after the bank realized how weak the financial institutions had become. Loans [from the Central bank] to financial institutions in bonds and bills were approximately 300 billion ISK in October 2008. This lead to the technical bankruptcy of the [Central] bank in October 2008.

The directors of the Central bank had been quite worried from November 2007 about the standing of the banks. In spite of this, these worries were only relayed by informal means. Thus, the assessment of the Central bank and logical reaction to that assessment were not in accordance. The Parliamentary committee thinks that the communications between the directors of the Central bank and the government were not at all normal and in accordance with good governance.

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