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30. mars 2009

The Kaarlo Jännäri Report on Banking Regulation and Supervision in Iceland Recommendations and Conclusions

In November 2008, as part of its Stand-By Arrangement with the International Monetary Fund, the Icelandic Government undertook to invite an experienced bank supervisor to assess the regulatory framework and supervisory practices in Iceland and to propose needed changes. In particular, the expert was called upon to assess the framework of rules on liquidity management, connected lending, large exposures, cross-ownership, and the “fit and proper” status of owners and managers. It was agreed that the assessment will be made public and should be ready by the end of March 2009.

The report begins with an overview of the institutional framework in the Icelandic financial regulatory and supervisory field, goes on to describe the crisis and the developments that led to it, and then describes the main elements of the areas on which the assignment was to focus, with the addition of a few items that are considered to be relevant to the assessment. The final chapter contains conclusions and main recommendations for the future.

Recommendations for the future

Mr. Jännäri writes: ,,I assume that the future banking system in Iceland will be very different from the old one. The banks will be traditional commercial banks based on domestic Icelandic markets.

The macroeconomic setting of the future is more difficult to forecast, but I think there is a high probability that Iceland will join the EU and adopt the euro in the next five years or so. This would solve the problem of the small and volatile currency. Before projecting that far, however, the problem of indexation must be tackled, as well as the role of the HFF.

With this sort of vision in mind, I would summarise my major recommendations for the future as follows. In the body of the report are a number of other, more minor, recommendations.

  1. Decrease the number of ministries that have a hand in financial market legislation or are otherwise involved in the financial markets.
  2. Merge the CBI and the FME, or at least bring them under the same administrative umbrella (as in Finland and Ireland).
  3. Give more discretionary powers to the FME and encourage it to use its powers more forcefully.
  4. Create a National Credit Registry at the FME to diminish credit risks in the system and to provide a better overview of large exposures at the national level.
  5. Lay down tougher rules and, subsequently, apply strict practice on large exposures, connected lending and quality of owners, using discretionary best judgment when necessary.
  6. Conduct more on-site inspections to verify off-site supervision and reports, particularly on credit risk, liquidity risk and foreign exchange risk.
  7. Review and improve the deposit guarantee system, closely following the developments within the EU.
  8. Participate actively in international cooperation on financial regulation and supervision, particularly within the EEA and EU.”

The causes of the collapse

In Mr. Jännäris view, the collapse of the Icelandic banking sector resulted from a combination of several factors that can be described – in the same way as was done in the analysis of the Norwegian banking crisis – as bad banking, bad policies and bad luck. For further information on this, please turn to chapter 10 in the report.

On Kaarlo Jännäri

Kaarlo Jännäri is a former Director General of the Financial Supervision Authority in Finland where he served from 1996 to 2007. He was Head of Financial Markets Department of the Bank of Finland, He also served as CEO and Chairman of the Board for SKOP-bank after it was taken over by the government during the banking crisis in Finland in the early 1990 to mention only few of the positions he has held throughout his long career in banking. Mr. Jännäri has also extensive experience in the field of international banking and banking supervision, serving as a consultant to the IMF on various occasions, on OECD committees and also committees of the European Central Bank. Mr. Jännäri is now retired.

The report in full


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