TAILIEUCHUNG - Causes of the Collapse of the Icelandic Banks - Responsibility, Mistakes and Negligence

It could be argued that the prevailing sense of interest rate predictability at the time of the “conundrum” combined with a banking system willing to take huge duration exposures would have made a policy of bond sales ineffective. But it should be remembered that this sense of interest rate predictability was itself deliberately nurtured by the Federal Reserve policy of a “measured pace” in increasing the Federal funds rate. The Federal Reserve was anxious to avoid a bond market collapse similar to the one that took place around the early 1994 tightening. This predictability itself probably made banks and others. | Chapter 21 Causes of the Collapse of the Icelandic Banks - Responsibility Mistakes and Negligence Introduction The aim of this report is to portray as comprehensively as possible the events that lead to the collapse of the banks and seek to answer what caused their failure. In this Chapter the main conclusions of the Special Investigation Commission SIC already discussed in previous Chapters are summarised. It must be reiterated that this is only a summary and therefore drawing wide conclusions on this chapter alone may present difficulties. Hereunder the SIC will begin by discussing certain aspects of the operations of the Icelandic banks which it considers the main causes for their failure in the autumn of 2008. Thereafter the SIC adverts to the performance of government functions during the events leading to the failure of the banks and draws further conclusions from specific aspects of it. Finally the SIC recounts its assessment and findings regarding mistakes and negligence within the meaning ofArticle 1 1 ofAct No 142 2008 concerning the implementation of laws and rules on the regulation and control of financial activities in Iceland. Financial Markets in the Run-up to the Collapse of the Icelandic Banks Main Reasons Growth of the Banking Industry and Credibility Explanations for the collapse of the banks Glitnir Kaupthing Bank and Landsbanki are first and foremost to be found in the rapid growth of their balance sheet and hence their size at the collapse. At the turn of the century the Icelandic banks mainly served Icelandic parties with regard to their business-related activities in Iceland. At that time the financial position of the three big banks amounted to just over one year s gross domestic product in Iceland. As the first decade of the 21st century wore on the foreign operations of the banks grew rapidly both due to services rendered to Icelandic parties with increased foreign activities and as to foreign entities that were

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