The FME, the Icelandic equivalent of the FSA (Financial Services Authority) decided to create a new bank model and announced today in a press release its course of action after the near total collapse of its commercial banking sector.
Iceland’s government has taken control of not one, but three commercial banks, namely Landsbanki, Glitnir and recently Kaupting -the country’s largest bank – in the past few days in an effort to ensure continued commercial bank operations.
Iceland’s banking industry collapsed all together under the weight of $61 billion of foreign debt that was carrying on their shoulders. Now, I know that the more we hear huge numbers, the more we are getting used to them and they end up meaningless. To give you an idea what the Icelandic bank model used to be just think about this for a minute: the amount of foreign debt is 12 times the size of the economy as a whole.
Obviously, it is practically impossible especially in the current market conditions for the government to cover these losses. Instead, the FME has decided to separate the domestic from the international businesses of Landsbanki, taking over the operations of the domestic bank. They actually managed to keep all branches open and to guarantee deposits.
The new domestic bank is called “New Landsbanki” and this bank takes over the bulk of the assets relating to domestic operations, such as loans and deposits. More information about the ifnal asset versus liability settlement will be made public within 30 days.
What remains to be seen, is whether they will apply this new bank model to their other acquisitions, ie Kaupting and Glitnir? Makes sense…