How did Iceland clean up its banks?
10 February 2016
The 2008 global financial crisis hit Iceland hard. The currency crashed, unemployment soared and the stock market was more or less wiped out. But unlike other Western economies, the Icelandic government let its three major banks - Kaupthing, Glitnir and Landsbankinn - fail and went after reckless bankers. Many senior executives have been jailed and the country's ex-prime minister Geir Haarde was also put on trial, becoming the first world leader to face criminal prosecution arising from the turmoil. although he was subsequently cleared of negligence. So what can - or should - other countries learn from how Iceland responded? Four experts talk to the BBC World Service Inquiry programme. Gudrun Johnsen was on the special commission set up to learn lessons from Iceland's banking collapse. "The banks were 10 times the GDP of Iceland; 20 times the state budget. They were too big to bail out. "The stock market collapsed: 80% of the stock market was wiped out overnight. Shareholders were badly hurt. About every other business in Iceland became technically bankrupt. "97% of the banking sector collapsed in a matter of three days, and I hope I will not witness this anywhere in the world again. "People felt very let down. They were very angry and took to the streets. Two or three per cent of the entire nation gathered in front of parliament demanding answers. "The government demanded that the banks decrease the debt of households [owing more than the value of their house], and that people would not be driven into bankruptcy. "The government also set up a special agency where people in big financial trouble could apply for debt forgiveness. "Parliament had to respond to the outcry and set up a Special Investigation Commission, equipped with enormous data privileges so it could reveal the truth behind the collapse. "It found the assets of the banks and the loans had been extended into a cobweb: firm A owns firm B, which owns firm C and, sometimes firm C owns firm A. There was virtually very little or no equity in those businesses. The operations are entirely dependent on credit from the banks. "What also came to light was that those who owned these pyramids of corporations were in the ownership of the largest shareholders of the banks themselves. That was very worrisome - we had a financial system that was really opaque. The bankers didn't really know how much equity there was to be matched against the loans they were extending. "If you don't know exactly what happened, you don't know what type of behaviour you need to correct, and cultural change is really difficult. There was a benefit in the entire system going down. We know what failed and as a consequence we were able to clean house pretty quickly." Olafur Hauksson was a special prosecutor working on the collapsed bank cases in Iceland. They have brought 28 cases, with more than 60 prosecutions. "It's been quite time-consuming: in one of the biggest cases we have 22,000 pages. "After the three biggest banks failed, the Financial Supervisory Authority took them over and put in Resolution Committees. These were obligated to have auditors go through the books and return a report to the Supervisory Authority. They were obligated to give us information of anything suspicious. "In the beginning, we thought we may find something that was linked to the bank collapse itself; someone trying to take his chances because of the confusion of the crisis. But what came up was that many of the cases that we investigated stretched back several years. "It was difficult to decide the difference between criminality and crazy banking, but we were more focused on how they gave their loans out; if they followed proper procedures. If they didn't, that was an indication of some wrongdoing. "We had an inside fraud case, and a manager in the Ministry of Finance received two years' imprisonment. Then we had the Exeter Case. The CEO of that bank and the chairman got four and four and a half years' imprisonment. "We had an inside fraud case [which got] 12 months' imprisonment; breaches on the Company Act [which got] six and eight months' imprisonment and the lawyer was revoked. "Then we had a market manipulation case and fraudulent loans case connecting to Landsbanki. They got three and a half years. "The CEO for all of the Banki (Icelandic banks) received 18 months, and one of the brokers received nine months. Then we have the BK case. Four were found guilty: two received four years, one received three and one received two. "There has been huge conflict in the courtrooms. It has been a big fight. They were testing on each and every inch of our cases. "I do not think that we'd be able to establish faith in the system without this being dealt with. It is always about trust." Asgeir Jonsson is the former chief economist at Kaupthing Bank. "Before the crisis we got 500,000 foreign visitors every year. It was not until three or four years after the crisis that things started to happen. Last year we had about 1.5 million people visiting, and there is a 20% increase every year. "During the boom, most of the engineers or computer people would get good jobs with the banks, but during the depression they had to create something for themselves. "The Icelandic government had to take on a lot of new debt to fund the new banks, but a lot of that expense has been repaid. We risked a deal with the other creditors of the old banks last year, which basically means that the government will get all the expenses repaid. So the state finances are now in pretty good shape, much better than expected. "We used to have multinational companies - many of them have left. If you were to found a company in Iceland now which was focused on international markets, you would soon take it out of the country, because you would not want to be locked in our capital controls. "The new jobs are not very high-paying because tourism is a service sector, not heavily dependent on educated people. We are actually importing labour - mostly from Eastern Europe - to work in the tourist sector. Many of the young Icelandic people are leaving. "We just had to accept the losses, accept a world with much lower real wages, much lower living standards. I think in many ways this is something other Western countries will have to face. "In European banking, there is an unwillingness to accept losses. If you look at how the central banks in the UK and the US and in Europe responded, they printed money. "We could not print money, so we had to face the reality. No-one really knows how all the money printing that has been taking place in the major economies of the West will end." Dr Jay Cullen is a lecturer in banking and finance law at the University of Sheffield. "It's difficult to draw parallels from the Icelandic experience. "Iceland experienced a massive increase in the size of its banking system over a very short period of time from about 2000 onwards. "I'm not sure that the Icelandic financial system was as important to the performance of the Icelandic economy as say, the City of London is to the UK. The UK economy is much more developed than Iceland's. It's much more reliant upon financial services as a whole. "The frauds involved were overt. There was substantial market manipulation going on, insider trading. These practices did occur in the UK and the US, but they weren't systemic. There was fraud in the US mortgage market, but at fairly low levels. Perhaps the criminal law ought to have bitten, or been employed more vociferously. "The power of the banking lobby in the UK and the US is such that it's politically very difficult to make an enemy of big business. "There has to be a fundamental change in the structure of the banking system, and that requires huge political will and sacrifice, and it's not evident to me that exists, because so little has changed since 2008. "Now in the US, the banks are even larger than they were pre-2008. They are not only too big to fail, they are too big to manage and possibly too big to exist. The old phrase was, 'Main Street will never again bail out Wall Street.' "That's a noble claim, but the evidence suggests that in the UK and the US, and also in the eurozone, where several countries simply have broken banking systems, the taxpayers are still on the hook.  Very little has been done, and the day of reckoning is potentially around the corner." The Inquiry is broadcast on the BBC World Service on Tuesdays from 12:05 GMT. Listen online or download the podcast.
Dr Jay Cullen is a lecturer in banking and finance law at the University of Sheffield. "It's difficult to draw parallels from the Icelandic experience. "Iceland experienced a massive increase in the size of its banking system over a very short period of time from about 2000 onwards. "I'm not sure that the Icelandic financial system was as important to the performance of the Icelandic economy as say, the City of London is to the UK. The UK economy is much more developed than Iceland's. It's much more reliant upon financial services as a whole. "The frauds involved were overt. There was substantial market manipulation going on, insider trading. These practices did occur in the UK and the US, but they weren't systemic. There was fraud in the US mortgage market, but at fairly low levels. Perhaps the criminal law ought to have bitten, or been employed more vociferously. "The power of the banking lobby in the UK and the US is such that it's politically very difficult to make an enemy of big business. "There has to be a fundamental change in the structure of the banking system, and that requires huge political will and sacrifice, and it's not evident to me that exists, because so little has changed since 2008. "Now in the US, the banks are even larger than they were pre-2008. They are not only too big to fail, they are too big to manage and possibly too big to exist. The old phrase was, 'Main Street will never again bail out Wall Street.' "That's a noble claim, but the evidence suggests that in the UK and the US, and also in the eurozone, where several countries simply have broken banking systems, the taxpayers are still on the hook.  Very little has been done, and the day of reckoning is potentially around the corner." The Inquiry is broadcast on the BBC World Service on Tuesdays from 12:05 GMT. Listen online or download the podcast.
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