01 The Hour
10:10
Wednesday 8 October 2008, London
The Landsbanki Freezing Order was made at ten o'clock that morning and came into force ten minutes later. Alongside the bank it named the Central Bank of Iceland at Kalkofnsvegi 1 in Reykjavik and the Icelandic financial supervisor, and it froze funds held or controlled in the United Kingdom in relation to Landsbanki.
Two of Iceland's three large banks had passed to the supervisor at home the previous day, and their domestic branches had stayed open. The third was still trading. The powers used were sections 4 and 14 of and Schedule 3 to the Anti-terrorism, Crime and Security Act 2001.
02 The Sequence
29 Sep Monday. The Icelandic government is forced to take a 75 per cent stake in Glitnir, the third largest bank, after short-term funding problems.
6 Oct Monday. Trading in the six largest Icelandic financial shares is suspended. The Althing passes the Emergency Act, which lets the supervisor assume the powers of a shareholders' meeting, dismiss a board and appoint a receivership committee, and which makes domestic deposits priority claims. The Prime Minister states that deposits and private pension savings in all Icelandic banks are secure and will be reimbursed in full. The Central Bank lends Kaupthing 500 million euros against collateral in its Danish subsidiary.
7 Oct Tuesday. The supervisor takes control of Landsbanki and of Glitnir. Its release says the domestic branches and internet operations will be open for business as usual and that domestic deposits are fully guaranteed. Icesave, the online arm in Britain, tells its customers they can no longer withdraw or deposit. Landsbanki had about 4.5 billion pounds of retail deposits in its UK branch.
8 Oct Wednesday. The Freezing Order is made at 10.00 a.m., comes into force at 10.10 and is laid before Parliament at noon. In the Commons the Chancellor says no depositor will lose money through the closure of Icesave. The regulator finds Kaupthing Singer and Friedlander in default; its retail deposit book is transferred to ING Direct and the remainder goes into administration.
8 or 9 Oct Accounts differ on when Kaupthing itself passed to the supervisor. The Treasury Committee's report places it late on the Wednesday. The EFTA Surveillance Authority and the Bank for International Settlements both record the supervisor taking control on the Thursday.
9 Oct Thursday. The Treasury grants a general licence, the day after the order, to let the London branch continue the commercial finance operations on which a number of UK businesses depended for immediate cash flow, and to confirm permitted transactions including set-off and netting where Landsbanki was the counterparty.
14 Oct Tuesday. The Central Bank draws 200 million euros from each of its swap lines with the Danish and Norwegian central banks, the proceeds going to secure trade in essential goods.
17 Oct Friday. Treasury guidance addresses the geographical scope of the order. The Financial Markets Law Committee's later assessment records that the uncertainty had run for nine days, during which transactions were suspended.
28 Oct Tuesday. Both Houses approve the order, twenty days after it came into force, together with an amending order making technical changes.
19 Nov Wednesday. The IMF approves a 2.1 billion dollar arrangement for Iceland.
03 The Hidden Dependency
The domestic side held. The supervisor's release of 7 October said the branches and internet operations would open as usual, and the Central Bank governor of the time later recorded that priority was given to maintaining payment intermediation and uninterrupted banking operations, and that those efforts succeeded in spite of the freezing order.
The route in and out of the country was the part that had to be rebuilt. For the first months after the failures the Central Bank of Iceland acted as the intermediary for payments to and from Iceland. The swap drawings of 14 October went to securing trade in essential goods.
A domestic payment system can go on clearing while the correspondent path out of the country is reassembled around the central bank.
04 What Still Worked
The Domestic Branches
The supervisor's stated purpose in taking control was to ensure continued commercial bank operations in Iceland, and its release said branches and internet operations would run as usual.
Domestic Deposits
The Emergency Act made deposits priority claims in the failed institutions, and the supervisor stated that domestic deposits were fully guaranteed.
The Licensed Exceptions
The order carried a power for the Treasury to license exceptions. The general licence of 9 October kept the London branch's commercial finance operations running for the UK businesses that drew their cash flow from them.
05 The Document
The Document 8 Oct 2008
Statutory Instruments 2008 No. 2668, under the heading Banks And Banking. Three timestamps sit at the head of it: made at 10.00 a.m., laid before Parliament at 12.00 noon, coming into force at 10.10 a.m. The recital states the Treasury's belief that action to the detriment of the United Kingdom's economy has been or is likely to be taken by certain persons who are the government of or resident of a country outside the United Kingdom. Article 2 defines the Authorities, listing the Central Bank of Iceland with its street address.
06 The Pattern Library
1
When one retail withdrawal channel closes or fails, demand concentrates on whichever channel is left open, and the capacity of that channel sets what a depositor can obtain.
Observed: Northern Rock 2007, Cyprus 2013, India 2016, Greece 2015.
2
A currency replacement can require physical modification of each cash dispensing machine before the new notes can be issued, so the machine estate returns to service site by site rather than at once.
Observed: India 2016.
3
Withdrawal limits imposed on a domestic banking system can be written to exempt cards issued outside it, so one machine dispenses under two rules according to where the card was issued.
Observed: Greece 2015.
4
Domestic payment and deposit channels can continue operating while cross-border payment routes fail, with the central bank standing in as the intermediary for payments to and from the country.
Observed: Iceland 2008.
Changed today: No existing entry gained Iceland 2008. The domestic retail channels stayed open, so withdrawal demand did not move to a surviving channel, and no currency was replaced. Entry 4 added, on domestic rails continuing while the route in and out of the country was rebuilt around the central bank.