TOO BIG TO FAIL OR TOO BIG TO

TOO BIG TO FAIL, OR TOO BIG TO SAVE? Gunnar T. Andersen Director General & CEO Financial Supervisory Authority - Iceland securities market credit market pensionmarket insurance market 4 th ICAC SYMPOSIUM HONG KONG 15 -17 December 2009

FINANCIAL SUPERVISORY AUTHORITY 2

AGENDA Iceland Synopsis Growth of financial sector Collapse of banks and financial turmoil The challenge to authorities Financial Supervisory Authority – Iceland Investigations and sanctions Looking forward 3

ICELAND: AN ISLAND IN THE NORTH ATLANTIC ICELAND HONG KONG 4

ICELAND SYNOPSIS ICELAND: Population: 320, 000 Area: 103, 000 square km Capital: Reykjavik GDP in 2008: USD 16. 7 bn 5

FOREIGN LIABILITIES OF BANKS AS MULTIPLE OF GDP

THE ICELANDIC ECONOMY CRASH-LANDED A crash-landing became unavoidable at the end of 2008 in the wake of the collapse of the three largest commercial banks and other financial entities 7

FINANCIAL TURMOIL; SEPTEMBER-OCTOBER 2008 The FME took control of: Landsbanki Íslands hf. Glitnir bank hf. Kaupthing bank hf. Straumur Investment Bank The FME intervened in: Sparisjódabanki Íslands hf. (Icebank) Reykjavík Savings Bank (Spron) Objective of takeovers by the FME: To ensure a functioning financial system 8

FAILURE OF 3 LARGEST ICELANDIC BANKS - SUPERIMPOSED ON LARGEST U. S. BANKRUPTCIES Assets USD bn Firm Year Type 1 Lehman Brothers 2008 Investment Bank 691 2 Washington Mutual 2008 Savings and Loans 328 3 World. Com 2002 Telecommunications 104 4 General Motors 2009 Auto mfg. 91 5 Kaupthing Bank 2008 Commercial/Investment Bank 83 6 CIT Group 2009 Bank Holding Company 80 7 Enron Corp. 2001 Energy Trading, Natural Gas 66 8 Conseco 2002 Financial Services Holding Co. 61 9 Landsbanki Islands 2008 Commercial/Investment Bank 50 Glitnir Bank 2008 Commercial/Investment Bank 49 Rank 10 9

FAILURE OF 3 LARGEST ICELANDIC BANKS - SUPERIMPOSED ON LARGEST U. S. BANKRUPTCIES Combined, the 3 largest Icelandic banks rank third if superimposed on the list of the largest U. S. bankrupcies Rank Firm Year Type Assets USD bn 1 Lehman Brothers 2008 Investment Bank 691 2 Washington Mutual 2008 Savings and Loans 328 3 3 Icelandic Banks 2008 Commercial/Invest. Banks 182 3 World. Com 2002 Telecommunications 104 4 General Motors 2009 Auto mfg. 91 6 CIT Group 2009 Bank Holding Company 80 7 Enron Corp. 2001 Energy Trading, Natural Gas 66 8 Conseco 2002 Financial Services Holding Co. 61 10

THE OMXI 15 INDEX 30. 8. 2008 – 30. 6. 2009 The stock market lost 92% of its value in a few weeks 11

COMPARISON OF SYSTEMIC BANKING CRISES ICELAND Source: Reinhart & Rogoff, “The Aftermath of Financial Crises”, 2008

COMPARISON OF SYSTEMIC BANKING CRISES Starting date Worst Yo. Y Real GDP growth, %1 Max unemployment Rate 2 Change in market index, Yo. Y %3 Fall in FX rate, %4 NPL, % total loans 5 Iceland 2008 -9. 6 [2009 e] 6. 9 [2010 e] - 91. 1 [2008] -55 [2008] ~50% (est. )6 Indonesia 1997 -13. 1 11. 5 -37. 0 -57. 8 46. 87 Thailand 1997 -10. 5 4. 6 -55. 2 -31. 1 30 -45 South Korea 1997 -6. 9 7 -42. 2 -45. 9 35 Norway 1988 -0. 2 6 -28. 9 -11. 6 16. 4 Sweden 1991 -1. 2 9. 3 15. 0 -8. 7 13 USA 1980 -1. 9 9. 7 -8. 2 4. 1 1. Source: Indonesia: IMF World economic outlook Oct 2008 (only Indonesia); Others: Data. Stream 2. Source: Thailand: National Statistical Office of Thailand; Others: Data. Stream 3. Source: Data. Stream – UK: FTSE All Share, Norway: MSCI Norway, Sweden: MSCI Sweden, Thailand: Bangkok S. E. T: , Korea: Korea SE Composite, Indonesia: Jakarta SE Composite, USA: S&P 500 Composite 4. Source: Data. Stream: USD to national currency quarterly variation, For USA GBP to USD 5. Source: IMF Systemic banking Crises: A New Database Oct 2008 6. Oliver Wyman analysis 7. Source: Bank of Indonesia Source of compiled data: Oliver Wyman

FX RESERVES OF THE CENTRAL BANK OF ICELAND AS % OF BANKS’ SHORT TERM, FX-DENOMINATED LIABILITIES

MOODY’S RATING OF ICELANDIC BANKS Moody’s rating system: 1. Aaa 2. Baa 3. Caa Aa Ba Ca Bank A B C Numerical modifiers are applied to each generic rating classification from Aa through Caa 2003 2004 2005 2006 2007 2008 Glitnir A 1 A 1 Aaa Aa 3 A 2 Kaupthing A 3 A 1 A 1 Aaa Aa 3 A 1 Landsbanki A 3 A 2 A 2 Aaa Aa 3 A 2 In early 2007, the 3 Icelandic banks were briefly assigned higher ratings than e. g. ABN Amro 15

CDS SPREADS The message came in loud and clear, but nobody in Iceland wanted to listen Kaupthing Bank Lehman Brothers 400 points 1000 points 16

ECONOMIC EXPANSION AND BOOM YEARS GDP grew by 130% 2000 - 2007 Stock market index grew by 174% 2004 - 2007 Housing prices rose by 74. 4% 2004 - 2008 Disposable income grew by 73% 2000 - 2007 Unemployment around 1% for most of the 1998 - 2008 period Assets of regulated entities grew by 554% 2000 - 2008 17

INTEREST RATE DIFFERENTIAL • 25 • Interest Rate, % • 20 • 15 • Icelandic and U. S. Interest Rates 1998 - 2009 • Fed Funds Overnight Rate • Icelandic Central Bank Overnight Loan Discount Rate • 10 • 5 • 0 • июл. 98 • июл. 99 • июл. 00 • июл. 01 • июл. 02 • июл. 03 • июл. 04 • июл. 05 • июл. 06 • июл. 07 • июл. 08 • июл. 09 18

NUMBER OF EMPLOYEES VERSUS INDUSTRY SIZE • 70 • 60 • 8 000 • Number of FME Employees • Assets Under Regulation, m. ISK • 50 From 2000 -2008, FME staffing approximately doubled Assets of regulated entities grew by 554% during the same period • 7 000 • 6 000 • 5 000 • 40 • 4 000 • 30 • 3 000 • 20 • 2 000 • 10 • 1 000 • 0 • 2000 • 2001 • 2002 • 2003 • 2004 • 2005 • 2006 • 2007 • 2008 • 2009 Source: Seðlabanki Íslands, Q 3 2008 is last available for 2008

POST-CRASH INVESTIGATIONS BY FME Investigations have turned up some long-running breaches of the law Cases under investigation involve widespread fraud stretching back for much of this decade q Market manipulation, insider trading, falsified reports In some cases, fraud appears to have been so prevalent as to have become normal business practice Fraud was perpetrated against the investing public, against the country as a whole, and against international lenders and bondholders The banking crisis in Iceland merely intensified in October 2008 The crisis was well underway by the middle of 2006. The groundwork for the crisis was laid years before 2006, at the end of the previous decade 20

LOOKING AHEAD Stepped-up supervision On-site inspections More forceful regulatory actions Greater deployment of IT Higher level of international cooperation New skills added to toolkit Forensic accounting New provisions in law Wider authority in dealing with bad practices Separation of commercial banking and investment banking (? ) 21

THANK YOU. securities market credit market pensionmarket insurance market 4 th ICAC SYMPOSIUM HONG KONG 15 -17 December 2009