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Document Type

Case Study

Case Series

Ad hoc Capital Injection

Abstract

Iceland’s three largest banks—Glitnir, Kaupthing, and Landsbanki—grew rapidly in the 2000s and failed amid depositor runs when they lost access to foreign funding markets at the onset of the Global Financial Crisis (GFC). On October 6, 2008, the Icelandic Parliament passed the Emergency Act, and authorities quickly used their new powers to nationalize the three banks. The Ministry of Finance created and capitalized Arion Bank (for Kaupthing), Islandsbanki (for Glitnir), and Landsbankinn (for Landsbanki), to hold the old banks’ performing domestic assets and all insured domestic deposits, and the prime minister assured all domestic depositors that they would be protected. On December 15, 2009, the state injected EUR 1 billion (USD 1.4 billion) in capital into the new banks. Because fiscal resources were limited, the capital injection was in the form of a new type of government bond. It also gave the old banks contingent bonds and equity stakes in the new banks. The size of the equity stake was based on provisional valuations of the assets in the new and old banks, with consulting firms commissioned in November and December 2008 to provide more definitive valuations. Based on these valuations, the government capitalized the new banks and provided the creditors of the old banks with equity stakes as compensation. The total state financing in the three new banks was EUR 1 billion. The creditors of Kaupthing received an 87% stake in Arion Bank, and the creditors of Glitnir received a 95% stake in Islandsbanki. The creditors of Landsbanki received a contingent bond as well as a briefly held 18% stake in Landsbankinn. The government holds stakes in Landsbankinn and Islandsbanki as of the writing of this case study, while Arion Bank has been fully privatized.

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