Restructuring of Icelandic Savings banks

PRESS RELEASE FROM THE CENTRAL BANK OF ICELAND:

Financial Supervisory Authority (FME) intervenes in operations of SPRON and Sparisjódabankinn. Government to support remaining savings banks.

Today the Icelandic authorities have taken co-ordinated action to protect the interests of savings bank customers and to ensure that banking services will be provided throughout Iceland. With the measures now taken, the foundation has been laid for sustained savings bank operations, enabling the savings banks to take an active role in rebuilding the Icelandic economy. The Government of Iceland underlines that deposits in domestic commercial and saving banks and their branches in Iceland will be fully covered. “Deposit” refers to all deposits by general customers and companies which are covered by the Deposit Division of the Depositors’ and Investors’ Guarantee Fund.

Today the FME has intervened in the operations of SPRON and Sparisjódabankinn on the basis of the Act on Authorisation for Treasury Disbursements due to Unusual Financial Market Circumstances, no. 125/2008.

Since the outbreak of the banking crisis in October 2008, the two banks have been operating on an exemption from FME’s capital adequacy requirements, and liquidity support has been provided by the Central Bank of Iceland. The liquidity support has been provided on the basis of two conditions. The first condition is that an agreement be reached with creditors, which would address the capital deficiency situation when combined with capital injections from the Government. The second condition is that these banks provide eligible collateral, thus minimising the risk to the Government of providing liquidity support. The two banks have been engaged in discussions with their creditors, focusing on these issues. Unfortunately, these discussions have not been successful. The liquidity position of both banks has continued to deteriorate, necessitating today’s decision by the FME.

Measures have been taken to strengthen the position of the following savings banks: BYR, Sparisjódur Bolungarvíkur, Sparisjódur Höfdhverfinga, Sparisjódur Keflavíkur, Sparisjódur Mýrasýslu, Sparisjódur Nordfjardar, Sparisjódur Sudur-Thingeyinga, Sparisjódur Strandamanna, Sparisjódur Svarfdæla, Sparisjódur Vestmannaeyja and Sparisjódur Thórshafnar. With appropriate measures put in place, these savings banks are deemed viable; therefore, they meet the requirements for liquidity support. The measures are further described below.

SPRON and its customers

SPRON customers will automatically have access to their deposits and banking services through New Kaupthing. Customers will be provided with information online and at SPRON and Kaupthing branches, where staff will be available to advise customers on how to proceed.

Sparisjódabankinn and its business partners

The Central Bank will take over the bank’s payment intermediation.

Measures in support of Iceland’s savings banks

The Act on Authorisation for Treasury Disbursements due to Unusual Financial Market Circumstances, etc., no. 125/2008, authorises the Treasury to contribute capital to savings banks in an amount ranging up to 20% of each savings bank’s own funds. Late in 2008, rules were adopted, specifying the procedure for savings banks’ applications for Treasury contributions on the basis of that statutory authority and setting forth the conditions for capital injections. The Ministry of Finance has already received requests for capital contributions from six savings banks and intends to expedite the processing of those applications.

Financial sector restructuring and fiscal implications

In the Government’s opinion, these measures will strengthen the banking system, and the resulting fiscal cost is well within the limits defined in the Government budget.

Ministry of Business Affairs, 21 March 2009