Questions surround Central Bank of Iceland lending practices

kronurIceland’s National Audit Office sent out a statement yesterday saying that questions surrounding the Central Bank of Iceland’s lending to financial institutions last year remain unanswered and should be directed to the Althingi Parliamentary Investigation Committee.

The statement focuses on the Central Bank’s losses due to collateral loans granted to financial companies in 2008. At the end of 2008, the Bank’s liabilities due to such loans amounted to ISK 345 billion (USD 2.7 billion at today’s rate). The bank lost ISK 75 billion outright and the government took responsibility for the other ISK 270 billion.

In the months leading up to the banking crisis, the three largest banks, which would soon collapse, secured loans from smaller financial companies, which then secured loans from the Central Bank against the uninsured shares. In August 2008, the Central Bank tightened its rules on collateral insurance, thereby pushing the banks towards trying this method of acquiring capital. According to the National Audit office, it should be asked why the Central Bank was not alarmed at this practice which ended up significantly worsening its, and the entire nation’s, financial position.

The report calls for Althingi to find out the answer to the above question, while stressing that it is a general point of interest and that no finger of blame is being pointed at this stage.

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