Northern Rock

"After the collapse of Northern Rock in August 2007 and subsequent concerns about other UK-based banks, what I had seen as a secure deposit base and a strength began to weaken. After the collapse of Lehman Brothers a year later, UK investors began a general run on bank deposits which was to pose jurisdictional questions in previously uncharted waters. Icesave became a problem because its UK deposits were held by a UK branch of Landsbanki, rather than by Heritable, which was a British bank wholly owned by Landsbanki. In hindsight, this was a major mistake by the management. I have to admit that, right up to the weekend of the collapse, I was unaware of such technicalities. It only started to dawn on me that this could be a difficulty when I spoke to the prime minister on 2 October. I can see it clearly now. Iceland is not a member of the EU, but an Icelandic bank had opened a branch in the UK, under EU regulation, and accepted deposits. So there was a jurisdictional issue – an issue that came to the fore over the weekend of 4–5 October 2008, as Iceland’s financial crisis unfolded."

"At that time, one of the main criteria analysts used when looking at a bank was how much of its asset base was funded by deposits. This became even more important after the collapse of the UK’s Northern Rock in August 2007, so Landsbanki put more emphasis on getting deposits. As Iceland’s population was not big enough to raise the deposits it needed, Icesave increasingly fulfilled this need. At the time this was seen as a highly prudent strategy. A deposits-to-assets ratio of anything above 50 per cent was considered good and Landsbanki’s ratio in 2008 was 60 per cent. This wasn’t a surprise. Landsbanki had deliberately targeted the UK savings market with highly competitive interest rates and £5 billion of deposits flooded in, mostly between January 2007 and October 2008. From a shareholder point of view, I saw this as de-risking the business, using money from small depositors to pay off the international bond markets so that we were less exposed to market volatility."