The Financial Supervisory Authority authorises ISB Holding ehf. to acquire a qualifying holding in Íslandsbanki

18.1.2010

The Financial Supervisory Authority (FME) has granted ISB Holding ehf. permission to acquire a qualifying holding in Íslandsbanki on behalf of Glitnir Bank hf. The permission is granted on the basis of a 13 September 2009 agreement between Glitnir and the Icelandic Ministry of Finance, authorising Glitnir to acquire a 95% holding in Íslandsbanki upon meeting specified conditions.

The FME had found Glitnir, which is in moratorium and undergoing winding-up proceedings, was not eligible to own a qualifying holding in a financial undertaking. The FME noted, however, that because of the extraordinary circumstances leading up to the agreement, and as the agreement represents a concurrence of opinion between the parties concerning Íslandsbanki operations, it would be possible to investigate whether the applicant could take adequate measures to limit detrimental effects of the ownership; cf. Article 43 of the Act on Financial Undertakings, no. 161/2002. The FME’s decision was to grant permission conditional upon decisive measures pertaining to the financial strength of the applicant, the ownership of the bank, supervisory interests, and the owners’ objectives.

The applicant’s financial strength shall be guaranteed through access to a special contingency fund that may be tapped should Íslandsbanki be faced with severe operational adversity. The amount of the fund was assessed by Íslandsbanki at the behest of the FME on the basis of a consistent methodology developed within the framework of the FME’s financial and operational survey of the new banks in May 2009.

The bank’s ownership shall be in the hands of a separate subsidiary of Glitnir, i.e. ISB Holding, which is governed by a board of directors with the majority consisting of  members independent of Glitnir, members representing large creditors, and Íslandsbanki itself. The Glitnir Resolution Committee has the option of appointing one representative to the three-member board of directors of ISB Holding, while the other two (including the chairman) must be independent. The nomination of all members to the board is subject to FME’s approval. Members of the board of directors must meet the FME’s qualification requirements, including those pertaining to financial knowledge and experience of financial operations.

The board of directors of ISB Holding exercises Glitnir’s voting rights in Íslandsbanki and shall appoint the members of the bank’s board. The FME also stipulates that only one of the members of the bank’s board may represent the Resolution Committee, while the others (including the chairman) shall be independent. This means that board members may not represent individual owners or creditors, nor may they be bound to them or to the bank itself through any type of special interests. According to a special representation agreement between ISB Holding and Glitnir, Glitnir agrees to respect the independence of the board of directors of the former company and its duty to promote sound and solid financial operations at Íslandsbanki free of external intervention. The board of directors of ISB Holding is required to report to the FME on the implementation of this policy on a quarterly basis.

In order to facilitate supervision, Glitnir is required to transfer the ownership of all  financial and insurance subsidiaries to a single parent company. This transfer of ownership is to be effected through by Glitnir Holding, a wholly owned subsidiary of Glitnir and is thus the parent company of ISB Holding.

The owners’ aims and objectives are restricted through specified requirements for transactions with related parties, dividend payments from Íslandsbanki, and the sale of Íslandsbanki shares over the next three years. In this context, Glitnir is required to notify the FME in advance of proposed changes in ownership of shares in Íslandsbanki or ISB Holding. Upon receipt of such a notification, the FME will carry out a new eligibility assessment of the prospective owners if the change of ownership affects the board of directors of the bank.

The FME has previously acquainted the three new banks with its supervisory requirements, which are based on a thorough assessment, conducted in May 2009, of the banks’ operability in terms of asset composition, funding and the economic prospects. The requirements entail a minimum capital adequacy ratio of 16% instead of the previous 8%, the ability to pass a new stress test assuming adverse economic developments for a longer period than generally expected, and more stringent liquidity requirements than imposed earlier. In addition, the new banks’ operating licences are conditional upon their implementing a detailed action plan for improved risk management and corporate governance.

Further information can be obtained from Sigurdur G. Valgeirsson, sgv@fme.is, at tel: +354 525-2700, and mobile phone: +354 840-3861.

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