Iceland: Kaupthing Emergency Liquidity Program, 2008

Following the privatization of Iceland's state-owned banks between 1998 and 2003, the three largest banks in Iceland--Glitnir, Landsbanki, and Kaupthing--grew rapidly, with consolidated assets increasing from 100% of Iceland's GDP in 2004 to nearly 900% by the end of 2007. Initially, this growth was funded by debt issuances in the European medium-term note market; however, as cracks in the international financial system appeared in 2006, the banks turned to offering high-interest savings accounts through their foreign subsidiaries. Beginning in October 2006, Kaupthing launched "Kaupthing Edge," an online savings and deposit platform operating in markets outside Iceland. When the United States investment bank Lehman Brothers failed in September 2008, Iceland's three major banks began to fail as a result of a run on their foreign currency deposits. On October 6, 2008, in an effort to prevent the failure of Kaupthing, the Central Bank of Iceland (CBI) provided it with a EUR 500 million loan against all of its shares in its subsidiary FIH Erhversbank A/S. Although the duration of the loan was initially set for four days, Kaupthing failed in three, on October 9. Immediately following Kaupthing's failure, the Icelandic Financial Supervisory Authority appointed a resolution committee, which, in tandem with the CBI, began searching for a buyer for FIH. Upon the transfer of FIH to a consortium of new owners in January 2011, the CBI recovered EUR 255 million--approximately half of the initial loan amount.