Iceland Bank Mergers & Acquisitions

Special thanks to my Icelandic friend Kristófer Jónatansson for sending me this Glitnir banki brochure all the way from Reykjavik.

In 2009, Glitnir was renamed Íslandsbanki by the Iceland government.


Collapse of the Icelandic Banking Sector in 2008

Between 1990 and 2007, Iceland, like many countries in the Western world, experienced a long period of debt-fuelled, unsustainable consumption growth. The phenomenon turned the traditionally fiscally conservative Icelanders into complacent debt-laden consumers. In addition, partly due to Iceland’s tiny population of 300,000, the country’s growth-hungry banking sector sought opportunities outside of the country during much of the 2000s.

The global asset bubble began to deflate in 2007, when tumbling housing prices caused many homeowners to default on their mortgages. It quickly turned into a full-blown banking crisis. By that time, Iceland’s three biggest banks Kaupþing / Kaupthing, Landsbanki and Glitnir had accumulated an unthinkable debt of USD $61-billion, which they had borrowed to fund their overseas lending activities. The amount represented 12 times the annual GDP of Iceland. The island nation's super-high consumer and foreign debts did not escape the world’s scrutiny. When revered U.S. investment bank Lehman Brothers went bankrupt in September 2008, investors quickly withdrew funding to the risky banks. Unlike banks in other countries that rely on a stable deposit base to fund their lending activities, Iceland’s banks had to rely on borrowing from the international credit market to re-lend to others to fulfil their loan commitments. When the credit market seized up in late 2008, the Icelandic banks were unable to re-finance their debts and collapsed like a deck of cards practically overnight on 2009-09-29.

Within a week, the Iceland government nationalized Landsbanki and Glitnir to guarantee their domestic deposits to avert a general bank run. Of particular note of the banks’ collapse was Landsbanki’s British and Dutch on-line operations Icesave, which had attracted a significant clientele thanks to its high savings interest rates. On 2008-10-08, when it became apparent that Landsbanki was insolvent and unable to repay the Icesave depositors in Britain and the Netherlands, the British government activated its anti-terrorism legislation to freeze GBP 4-billion of British assets held by Landsbanki, the Central Bank of Iceland and the Icelandic government. The unilateral freezing of another Western European nation’s assets caused a major diplomatic uproar between Britain and Iceland.

On the same day, the last of the Icelandic Big Three, Kaupþing also collapsed and was placed under government administration. The panic had caused Icelandic króna (ISK, krona) to fall from about 90 krónur per Euro in 2007 to 340 krónur per Euro in the black market in October 2008. (Iceland shut its stock and foreign exchange markets briefly to stem the panic.) Thankfully, by November 2008, the British, Dutch and Icelandic governments reached an agreement to unfreeze Iceland’s assets in Britain and to settle on Landsbanki’s Icesave liabilities. Over the next several months, the IMF and a group of investors lent USD $5.1-billion to Iceland to avert a default on its national debt.

Initially, the Icelandic government was to re-capitalize the three banks were then re-capitalized in 2009 with ISK 270-billion (Eur 1.53-billion, USD $2.16-billion) of Icelandic sovereign bonds. Iceland proposed to transfer ownership of the banks to their foreign creditors to settle their claims. As the international credit and banking market calmed throughout 2009, however, the Resolution Committees of Glitnir banki, Kaupthing and Landsbanki Íslands representing thier creditors, agreed to contribute a large portion of the new capital to the three banks, reducing Iceland's cost of financing to ISK 184-billion from ISK 270-billion.

In December 2009, the Icelandic parliament approved a bill to repay the British and Dutch governments the Eur 3.92-billion it borrowed to reimburse the depositors in those countries when Landsbanki’s Icesave on-line banking failed in 2008. Iceland would repay GBP 2.3-billion (USD$ 3.76-billion) to Britain and Eur 1.3-billion (USD $1.88-billion) to the Netherlands over a nine-year period beginning in 2016. Iceland was required to settle these claims before the IMF would proceed on forwarding their bailout funds.

In January 2010, however, the president of Iceland Olafur Grimsson vetoed the agreement passed by the Icelandic parliament to repay Britain and the Netherlands over Icesave's liabilities. Citing that over 20% of Iceland's population had signed a petition opposing the deal, Mr. Grimsson would now ask the general population to decide on the matter in a referendum. Britain immediately threatened that it would block Iceland from obtaining for EU membership unless it committed to the original repayment agreement.

Íslandsbanki hf. (Islandsbanki, formerly Glitnir banki hf.)

After the nationalization of Glitnir banki in 2008, the bank was renamed Íslandsbanki (Islandsbanki) once again in 2009, resurrecting the old name that had been disused since 2006. Glitnir banki was formed in 2000 when the old Íslandsbanki and FBA (Fjárfestingabanki atvinnulífsins - The Icelandic Investment Bank) merged. The combined bank initially took the name Íslandsbanki-FBA but the FBA reference was dropped in 2001. Then in 2006, the old Íslandsbanki adopted the name Glitnir.


Íslandsbanki (old)

Íslandsbanki was originally established in 1904 by a number of Danish investors as a privately-owned quasi-central bank of Iceland. The bank held the exclusive right to issue the Icelandic currency backed by gold. Íslandsbanki, however, was also a typical commercial bank offering deposit and loan products. The bank quickly gained market share from its archrival Landsbankinn Íslands.

The economic upheavals following World War I, however, caused export prices to plummet and sent Iceland into a deep recession. Meanwhile, countries around the world abandoned the gold standard and currencies were mostly not backed by gold anymore. A wave of loan defaults shook Íslandsbanki and it lost its right to issue the national currency in the early 1920s. When another wave of panic hit the world economy from the collapse of U.S. share and real estate prices in 1929, Íslandsbanki became insolvent in 1930.

The Icelandic parliament subsequently restructured Íslandsbanki into the Útvegsbanki Íslands (The Fisheries Bank of Iceland) in the same year, and Íslandsbanki’s creditors were given a stake in the new Útvegsbanki. In 1990, Útvegsbanki merged with three other Icelandic banks Iðnaðarbanki Íslands (Industrial Bank of Iceland), Verzlunarbanki Íslands (Commercial Bank of Iceland) and Alþýðubankinn (People's Bank) and revived the old Íslandsbanki name.


FBA

FBA - Fjárfestingabanki atvinnulífsins, on the other hand, was formed in 1998 by the merger of three state-owned investment credit funds: The Fisheries Investment Fund (est. 1905), The Industrial Loan Fund (est. 1935) and The Industrial Development Fund (est. 1970).

Recent transaction(s):

• In 2000, Íslandsbanki and FBA merged to form Íslandsbanki-FBA. The FBA part of the name was dropped in 2001. With Iceland's population being under 300,000, Íslandsbanki began to look for growth outside of the island nation.
  In 2004, Íslandsbanki bought Norway's Kredittbanken for NOK 345-million (USD $51-million).
• Also in 2004, Íslandsbanki acquired Norway's Bolig-og Næringsbanken ASA (BNbank) for NOK 3.30-billion (USD $489-million).
• In 2006, Íslandsbanki changed its name to Glitnir to de-emphasize its Icelandic background. Glitnir is the Norse mythological home of Forseti, son of the divine pair Baldur and Nanna. According to Norse legends, those who visit the mythological home of Glitnir receive a pardon of their misdeeds and all quarrels are settled.
• In late September 2008, Glitnir banki became insolvent and the Iceland government initially planned to take a 75% stake in the bank by providing a Eur 600-million (USD $867-million) emergency bailout. When it became apparent the bank could not survive on its own, the government took full control of the bank and promised to guarantee all its domestic deposits.
• In August 2009, the Icelandic government announced plans to inject ISK 65-billion (Eur 360-million, USD $507-million) of Icelandic sovereign bonds into the state-owned Glitnir, now renamed Íslandsbanki, raising its core tier 1 ratio to 12 per cent. Once re-capitalized, Iceland would transfer the entire new Íslandsbanki to the foreign creditors of the bank to settle their claims.
• Later in 2009, however, the creditors of Glitnir agreed to contribute ISK 61.75-billion of the ISK 65-billion in equity needed to re-capitalize the bank, reducing the state's contribution to just ISK 3.25-billion. The Icelandic government would only hold 5% of the new bank, to be renamed Íslandsbanki. The government also agreed to provide ISK 25-billion of subordinated loans to the bank.

Arion banki (formerly Kaupþing Banki hf. / Kaupthing Bank)

As of November 2009, the New Kaupthing Bank has been renamed Arion banki. The original Kaupthing Bank offered corporate and investment banking and asset management services to business and corporate clients internationally. It also provides personal banking in Iceland through a network of branches. Kaupthing hf. was founded in 1982 as a financial advisor and securities broker. The broker expanded overseas in 1998 when Kaupthing Luxembourg S.A. was created in 1998. Two years later, Kaupthing Luxembourg obtained a banking licence and changed its name to Kaupthing Bank Luxembourg. Throughout the 2000s, more offices were opened in New York, Faroe Islands, Stockholm and Copenhagen.

Recent transaction(s):

• In 2002, Kaupthing bought Finnish securities firm Sofi Oyj.
• Also in 2002, Kaupthing bought Swiss-based Handsal Asset Management.
• Also in 2002, bought Swedish broker Aragon and later, a bank named JP Nordiska Bank AB. Later in that year, Kaupthing was listed on the Stockholm stock exchange.
• In 2003, Kaupthing merged with the newly-privatized Búnaðarbanki Íslands (Bunadarbanki, the Agricultural Bank of Iceland). Búnaðarbanki was founded in 1930 by the Icelandic government and offered banking services to individual and corporate clients.
• Also in 2003, Kaupthing acquired Norwegian asset manager Tyren Holding AS.
• In 2004, Kaupthing bought another Norwegian securities firm, A. Sundvall ASA.
• Also in 2004, Kaupthing acquired Danish corporate bank FIH Erhvervsbank.
• In 2005, Kaupthing bought British private bank and wealth manager Singer & Friedlander to form Kaupthing Singer, Friedlander.
• In 2007, as a sign of the pre-collapse exuberance, Kaupthing obtained banking licences in Dubai and Qatar.
• In August 2007, soon after the start of the global economic crisis, Kaupthing agreed to acquire Dutch merchant bank NIBC Holding NV for Eur 2.99-billion (USD $4.06-billion). NIBC provided corporate finance, investment management and risk management to mid-sized corporate clients around the world. The deal, however, was rescinded in January 2008 in the midst of the global stock market rout.
• In January 2008, Kaupthing acquired Robeco Bank Belgium. Robeco Bank Belgium was a small private bank and asset manager with about Eur 300-million in assets under management.
• On 2008-10-09, Iceland’s Financial Supervisory Authority seized control of the insolvent Kaupthing banki hf.
• In March 2009, Kaupthing sold its Swedish subsidiary Kaupthing Bank Sverige AB to Ålandsbanken.
• In August 2009, the Icelandic government announced plans to inject ISK 72-billion (Eur 399-million, USD $562-million) into the state-owned New Kaupthing in the form of Icelandic sovereign bonds, raising its core tier 1 ratio to 12 per cent. Once re-capitalized, Iceland would transfer 87% of the New Kaupthing to the foreign creditors of the bank to settle their claims.
• Later in 2009, however, the creditors of Kaupthing agreed to contribute ISK 62.64-billion of the ISK 72-billion in equity needed to re-capitalize the bank, reducing the state's contribution to just ISK 9.36-billion. The Icelandic government would now only hold 13% of the new bank, to be renamed Arion banki. The government also agreed to provide ISK 24-billion of subordinated loans to Arion.

Landsbankinn (formerly Landsbanki Íslands hf.)

Until the late 19th century, Iceland lacked any real bank or monetary system. There was a constant lack of currency, cash deposits had to be sent to Denmark across the Atlantic for safe custody and loans were hard to come by. The savings societies (sparisjóðir) only alleviated the problems ever so slightly. Domestic commerce and international trade were severely impeded by the lack of medium of exchange and basic banking service. It was under these circumstances that the Icelandic parliament established the Landsbankinn Íslands, literally the National Bank of Iceland, in 1886.

The Act that created Landsbankinn authorized the National Treasury to issue banknotes, which served as the starting capital of the bank. In 1887, Landsbankinn acquired the assets and operations of Sparisjóður Reykjavíkur (The Reykjavik Savings Bank). Landsbankinn only opened its first branch office in 1902, followed by another one two years later. In 1904, new competition arrived when rival Íslandsbanki opened for business and was given the exclusive right to issue gold-backed banknotes.

When Íslandsbanki experienced financial difficulties in the 1920s, the right to issue banknotes was reverted back to Landsbankinn. In 1927, the still state-owned Landsbankinn was officially made Iceland’s national central bank.

Iceland’s economy has always been volatile: the World War II boom was followed by a decade of recession, high inflation and currency devaluation. In 1957, Landsbankinn was divided into a central bank and the state-owned commercial bank. The formal separation of the Central Bank of Iceland and Landsbankinn happened in 1961. In the 1970s, the country once again experienced runaway inflation, and savers suffered tremendous losses in their purchasing power.

In 1986, deregulation in the Icelandic banking sector allowed banks to set freely their savings and loan rates for the first time. Privatization of the state-owned banks began in 1997 when Landsbankinn Íslands became a joint-stock company named Landsbanki Íslands hf. Between 2003 and 2008, Landsbanki expanded rapidly outside of Iceland, particularly in Britain and the Netherlands.

Recent transaction(s):

• On 2008-10-07, amidst the global banking crisis, the Iceland government took control of the insolvent Landsbanki. One day later, the British government activated its anti-terrorism legislation to freeze GBP 4-billion of Landsbanki’s and Iceland’s assets in Britain to ensure Iceland would compensate Landsbanki’s British depositors. The freeze was undone in November after Iceland promised to repay Britain and the Netherlands.
• In August 2009, the Icelandic government announced plans to inject ISK 133-billion (Eur 737-million, USD $1.04-billion) into Landsbanki in the form of Icelandic sovereign bonds, raising its core tier 1 ratio to 12 per cent. Once re-capitalized, Iceland would transfer the newly-named Landsbankinn to the foreign creditors of the bank to settle their claims.
• Later in 2009, however, the creditors of Landsbanki Íslands agreed to contribute ISK 28-billion of the ISK 150-billion in equity needed to re-capitalize the bank, reducing the state's contribution to ISK 122-billion. The Icelandic government would control 81% of the new bank, to be renamed Landsbankinn.
• In December 2009, the Icelandic parliament approved a bill to repay GBP 2.3-billion (USD$ 3.76-billion) to Britain and Eur 1.3-billion (USD $1.88-billion) to the Netherlands that it had borrowed when Landsbanki’s Icesave on-line banking failed in 2008.
• In January 2010, however, the president of Iceland Olafur Grimsson vetoed the agreement passed by the Icelandic parliament to repay Britain and the Netherlands over Icesave's liabilities. Citing that over 20% of Iceland's population had signed a petition opposing the deal, Mr. Grimsson would now ask the general population to decide on the matter in a referendum. Britain immediately threatened that it would block Iceland from obtaining EU membership unless it committed to the original repayment agreement.
• In February 2011, Iceland's politicians finally approved a revised Icesave bill, which would see Britain and the Netherlands recovering a total of USD $5-billion that they paid out to depositors when Icesave's British and Dutch operations collapsed. Under the new agreement, Iceland would begin to make repayments in 2016 and finish by 2046, at an interest rate of 3.3% per annum to Britain, and 3.0% to the Netherlands. The actual cost to the Icelandic state is expected to be only USD $435-million (ISK 50-billion), as the sale of Landsbanki's assets would cover most of the obligations.
  

Click here to return to the Index page.