Statement from Sigurdur Einarsson, Executive Chairman of Kaupthing Bank:
"When the board of directors reviewed the position of the bank at a meeting on 25 and 26 September, the bank was performing well and it appeared that the third quarter results would be good. Deposits had increased by an average of almost ISK 4 billion a day for the previous six months. The bank's liquidity position was therefore strong and there were plans to start buying back bonds issued by the bank. The liquidity position of Kaupthing Singer & Friedlander, the bank's UK subsidiary, was also good – probably the best of any bank in the United Kingdom.
Kaupthing had for a long time been preparing for a downturn in the markets, especially in Iceland since it had been clear for several years that the Icelandic krona was too strong. In order to counteract this possible downturn, Kaupthing had hedged its equity by transferring it into foreign currencies, decelerated the growth of corporate loans in Iceland and cut back its market share in that area. Kaupthing had not marketed loans in foreign currencies. Furthermore, it had increased the inflation indexed assets in its portfolio in Iceland and massively raised the proportion of deposits in its funding.
At the same time, dark clouds began to form in the international financial markets and trust between financial institutions quickly decreased. Banks became more reluctant to lend money to each other and retracted previous credit lines. On the morning of 29 September news emerged of the difficulties at Glitnir Bank and the authorities announced their plans to acquire a 75% stake in the bank. This triggered a series of events which nobody predicted or was able to control. This had an effect on the Icelandic economy and the króna went into freefall. Credit rating agencies downgraded their credit ratings for the Icelandic state and the Icelandic banks, and foreign investors unleashed a landslide in which they tried to get rid of Icelandic assets, regardless of how solid they were.
After British depositors withdrew their deposits from Icesave, Landsbanki's deposit account in the United Kingdom, the Icelandic Financial Supervisory Authority assumed control of Landsbanki. In the wake of this news, there was a significant increase in the outflow of deposits from Kaupthing Edge in the United Kingdom, despite the fundamental difference between Kaupthing Edge and Icesave that Kaupthing Edge was guaranteed by the British compensation scheme and Icesave by the Icelandic scheme.
After the British chancellor of the exchequer stated that Iceland did not intend to honour its obligations to British depositors, the Financial Services Authority in the UK transferred Kaupthing Edge from the bank's subsidiary, Kaupthing Singer & Friedlander. Kaupthing Singer & Friedlander was subsequently placed into administration and Kaupthing Bank's creditors pointed out that this situation represented an event of default according to the parent company's loan agreements and was therefore a technical default. It did not matter that the parent company had sufficient liquidity and its position was solid."
Kaupthing Bank has now requested that the Icelandic Financial Supervisory Authority, in accordance with the provisions of the new Act no. 125/2008, which was passed into law because of the unusual circumstances in the financial market, assume the power of Kaupthing Bank shareholders' meeting. Furthermore, the entire board of directors of the bank has resigned.
The Icelandic FSA has appointed a winding-up committee which now wields all the authority of the board of directors. The aim of these actions is to ensure adequate activities of the bank in Iceland and the stability of the Icelandic financial system. The bank's branches in Iceland will be open as usual, and it is hoped that the bank's clients will be inconvenienced as little as possible by these changes.
While the winding-up committee is in control of the bank, the bank may not be made subject to enforcement, preliminary seizure or insolvency proceedings. Call notices to the bank's creditors will not be issued.
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