Icelandic savings bank criticised for work practices before crash

It has emerged that before the Icelandic banking crash, the Keflavik Savings Bank (Sparisjodurinn i Keflavik) loaned related parties, owners and managers some 60 percent of the bank’s entire equity.

The country’s FME financial regulator harshly criticised the local savings bank’s emphasis on risky market exposure.

The FME’s scathing report on the Keflavik bank in September 2008 details how the bank loaned four customers around four billion kronur, or 27 percent of all its equity.

The bank loaned around 1,400 million kronur to the Blue Lagoon spa and a further 800 million to Hvatningu; a private company. The report also states that Grimur Karl Saemundsson, former chairman of the board at Icebank (which was the united wholesale and investment banking arm of all the many savings banks in Iceland) owned a 30 percent stake in the Blue Lagoon through the company Hvatningu, which he owned half of, RUV reports.

According to the FME, the Keflavik Savings Bank only measured connectivity between customers based on direct financial links and when the level of closeness between two parties was unclear, there was no formal process for investigating further. The bank was reportedly working on strengthening its monitoring process in the lead up to the crash.

The FME recommended in its report that a database be created so that related parties would not be able to borrow from the bank independently, as happened with the Blue Lagoon case.

At the end of May 2008, money loaned to the bank’s board members, their connected businesses and bank staff amounted to 28 percent of the bank’s capital. That figure rises closer to 60 percent when the bank’s small group of favourite customers is included.

At the time of the crash, many Icelanders held faith in the savings banks as they were perceived to be less aggressive than the big three banks and more risk averse. This did not always turn out to be the case; although the only two banks so far to have not taken a krona of tax payers’ money are both local savings banks.

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