30 December 2010

Negotiations on savings bank debt concluded

The Central Bank of Iceland has concluded contractual agreements concerning the debt of five savings banks that did not meet minimum capital adequacy requirements in the wake of the banking collapse. The savings banks in question are: Sparisjóður Bolungarvíkur, Sparisjóður Norðfjarðar, Sparisjóður Svarfdæla, Sparisjóður Vestmannaeyja, and Sparisjóður Þórshafnar og nágrennis. In addition, Sparisjóður Suður-Þingeyinga and Sparisjóður Höfðhverfinga have paid their debts to the Central Bank.

The Act on Authorisation for Treasury Disbursements due to Unusual Financial Market Circumstances etc., no. 125/2008, often referred to as the Emergency Act, authorises the Minister of Finance, on behalf of the Treasury, to contribute capital to savings banks in an amount ranging up to 20% of the book value of their own funds. Savings bank restructuring was originally based on the Emergency Act, but the savings banks’ financial position proved worse than previously expected, and a capital contribution in accordance with the Act would not have sufficed to correct their financial position. As a result, the savings banks needed participation from creditors in order to make financial restructuring feasible.

The Central Bank of Iceland became the savings banks’ main creditor with a decision by the Financial Supervisory Authority on 17 April 2009. The Central Bank then received claims as compensation when it took over the savings banks’ deposits with Sparisjóðabankinn (SPB) upon its collapse. In consultation with the Ministry of Finance, the savings banks were offered the opportunity to negotiate agreements with the Central Bank concerning their debts, upon the fulfilment of specified conditions. Thereafter, the savings banks began preparing proposals for financial restructuring, which they presented to the Central Bank and the Financial Supervisory Authority. The Financial Supervisory Authority then agreed that the savings banks should finalise restructuring negotiations with the Central Bank and other creditors, as its requirements had been met. The EFTA Surveillance Authority (ESA) approved the Government and Central Bank’s restructuring plans for the five savings banks in June 2010.

The Central Bank has attempted to protect the value of the claims it received as compensation for the deposits; nonetheless, the amount recovered will be far below the amount of the appropriated deposits. Claims written off amount to 4,564 m.kr., whereas a total of 3,982 m.kr. was received in satisfaction of the claims: 1,735 m.kr. in guarantee capital shares, 450 m.kr. in subordinated loans, 1,184 m.kr. in contractual loans, and 613 m.kr. in cash. The savings banks that previously did not meet minimum capital adequacy requirements have withdrawn their applications for capital injections from the Icelandic Government in accordance with the provisions of Act no. 125/2008. During the restructuring process, the Central Bank acquired a large part of the savings banks’ guarantee capital. The guarantee capital shares have been transferred to Icelandic State Financial Investments, which administers the holding on behalf of the State.

Before the banks collapsed in the autumn of 2008, there were 20 independently operated savings banks in Iceland. There are now 10. These savings banks operate 41 service locations nationwide, or roughly one-third of all bank branches.

Further information can be obtained from Már Guðmundsson, Governor of the Central Bank of Iceland, at tel: +354 569-9600.

No. 38/2010
30 December 2010