Bank Reconstruction Concluded

Press release No. 82/2009

Highlights

• Equity contribution by the state ISK 250 billion lower than originally estimated
• Interest cost 2009 and 2010 ISK 46 lower
• All banks now stand on solid foundations

The restructuring of Iceland’s three commercial banks is now concluded. Agreements have been reached between the Icelandic authorities and the new banks, on the one hand, and the Resolution Committees of Glitnir banki, Landsbanki Íslands and Kaupthing Bank on behalf of their creditors, on the other hand, on settlements concerning assets which were transferred from the old banks to the new ones established in October 2008. The three new banks, Arion banki, Landsbanki and Íslandsbanki, are now fully financed banks, with solid financial foundations, ready to provide corporate and household banking services.

The state’s total contribution to the banks amounts to ISK 135 billion. Since the capital injection original envisaged was ISK 385 billion, this amount is ISK 250 billion lower. In addition, the state has provided subordinated loans to two of the banks: to Arion banki, in the amount of ISK 24 billion, and to Íslandsbanki, in the amount of ISK 25 billion. The total financing contributed by the state to the banks’ reconstruction is therefore ISK 184 billion.

The outcome is extremely favourable for the Treasury and will result in lowering its interest expense in 2009 and 2010 by around ISK 46 billion from the original estimate. This is primarily due to the decision by creditors of Kaupthing and Glitnir banki to acquire Arion banki and Íslandsbanki respectively, which results in lowering interest expense in 2009 and 2010 by ISK 21 billion.

The state will have holdings in all three banks, with the largest holding 81% in Landsbanki, plus 13% in Arion banki and 5% in Íslandsbanki. These holdings will mean the state will have four directors on Landsbanki’s board and one each on the boards of the other two banks. The Icelandic State Banking Agency (ISBA) will control the state’s holdings in financial undertakings and handle all relations with financial undertakings owned by the state on its behalf. The Board of Directors of ISBA is responsible for appointing the state’s representatives to the boards of financial undertakings in which it has a holding, based on nominations of a special selection committee. ISBA and representatives of the state on the boards of financial undertakings implement the state's policy concerning ownership of financial undertakings. Its main objectives are to promote the development of a sound and healthy financial system to serve the interests of Icelandic society, to rebuild trust and credibility on the Icelandic financial market and to provide the state with a reasonable return on funding provided to Icelandic financial undertakings.

Last February the government decided to create a new and more stable framework for its work on bank reconstruction. It established an inter-ministerial steering group including representatives of the Prime Minister’s Office, the Ministry of Economic Affairs and the Ministry of Finance, with the latter directing the group. Þorsteinn Þorsteinsson was subsequently engaged by the Ministry of Finance as the state’s chief negotiator in discussions with Resolution Committees, together with the UK consultancy firm Hawkpoint.

Minister of Finance, Steingrímur J. Sigfússon:

Those persons who have played the major roles in this very comprehensive and complex process have practically moved mountains. The outcome relieves the Treasury of major burdens, especially in the form of interest payments in the next two years. We now have three healthy and fully financed banks, which can focus their efforts on providing both Icelandic households and businesses with the services they need. This good news is welcome encouragement as we head into the New Year, along with other positive news of lower interest rates, lower inflation, less unemployment and even GDP growth in 2010.

Reykjavík, 17th December 2009