Business Competitive Strategies of the Landsbanki Receivership - Case Study Example

Business Competitive Strategies: The Landsbanki Receivership Introduction The economic performance of any economy depends on the financial stability of the economy’s financial institutions. The wave of financial instability rocked Iceland in 2007 that led to the closure of some its major financial institution including Landsbanki. The shutdown of Landsbanki bank led to the Icesavediplomatic since the banks had expanded its operations internationally. Landsbanki, a privately owned bank in Iceland, went bankrupt in 2008. Other than affecting the local depositors, the Landsbanki Receivership affected the UK and Netherlands depositors thereby the dispute between Iceland and Netherlands and United Kingdom. Before being placed under receivership, Landsbanki was among three very significant financial institution in Iceland. The financial failure of this bank drained Investors’ and depositors’ guarantee fund of their capital reserve since the bank was now unable to repay the deposits as legally required. The table below indicated how the bank performed in 2008. Fig 1: The graph showing how the bank performed in 2008 to its receivership The Landsbanki receivership went diplomatic due to the fact that a night before the bank itself bankrupt, the national parliament passed a law that would ensure all banks’ (banks operation in Iceland) clients are compensated in case of a bank going bankrupt. Despite the clarity of this law, the government was not willing to state the formula it intended to compensate the British and Dutch clients to the sunk Landsbanki bank. In other words,the state of Iceland also refused to underwrite the liability to the bank. The Icelandic state could not have underwritten this liability since it had already lost access to funding at the credit market that resulted from the Icelandic financial crisis. Other than the government unwilling nature to case, the public through two referendums, also later rejected the proposed bilateral loan guarantees. The Iceland’s financial crisis started in late 2006 through to 2007 when Fitch, its credit-rating agency downgraded the country’s sovereign rating from stable to unstable or negative. Fitch cited current account deficit and high debts levels from companies among other factors. These factors raised the question on the stability of major Iceland banks as well as the Icelandic economic state. What followed after this analysis was inflation that led to the collapse of krona (Iceland’s currency) by nearly 20%. This occurred between January and May 2007. In reaction to the emerging state of economy, Iceland increased its banks’ lending rates by ¾ of a percent point. This made better currencies to fetch high interest; hence, affecting the local banks. Regardless of these poor Icelandic poor financial policies, banks with good leadership and management could have survived the wave. However, Landsbanki had poor management policies and one of the major factors that led to its collapse is its rapid expansion that made the bank to have more fixed assets than liquid assets. Notably, the rapid growth of this bank became its major threat since it concentrated on foreign activities. Following the collapse of the bank, the old Landsbanki’s domestic liabilities and assets were transferred to the newly founded Nyi Landsbanki bank that was now owned entirely by the state. The new Landsbanki was fully solvent and the foreign branches of bankrupt Landsbanki were left with €12.1bn of assets and liabilities worth €22.2bn. The dispute between UK and Iceland heated when UK parliament used anti-terrorism legislation on Iceland with intent to freeze all bank assets of Iceland that were in UK. The intending freeze was to hold until when Iceland completed mutual repayment as stated on the Icelandic minimum laws on deposit guarantees of 6 October 2008. The graph below indicates the aggregated size of the bank from 2001 to 2008. Fig 1: Aggregated size of the Landsbanki bank It is apparent that the banks started its rapid growth in 2003. This was marked by the completion of privatization of the bank. The bank grew internally and externally with internal growth making it increase its loan portfolio while external was marked by increased asset buying. The bank risked from these expansion since increased quantity of loan exposed the bank to poor management and supervision of the loans leading to increased non-performing loans. In its external growth, the bank extended its operation to international level where it acquired the FIH Erhvervsbank in Netherlands and Singer &Friendlander of UK between 2004 and 2005. Table 1: Aggregated growth of Landsbanki bank (the table showing until the end of the second quarter). Fig 2: largest Landsbanki borrowers just before the collapse of the bank The lending rate of the banks also increased with the parent companies lending between 50 and 60% of the total loans lent. The lending of foreign parties was enormous. Despite the 2007 mini financial crisis, the bank increased its foreign parties lending. This made the bank to risk further. At the liquidity crisis, the bank planned to reduce its lending amounts to its growing borrowing customers. Acting of such policy made the bank to deny its customers banking services. However, since the bank had grown out of its own control and infrastructure, supervision and management could not keep with rapid expansion; therefore, the bank was prone to too many mismanagement thereby leading to its collapse. Poor collateral made loans to be highly risky. Banks are usually supervised by commission formed by the state, however, in this case, FME which is mandated to supervise Icelandic banks never grew at the same rate the banks grew; thus, it was insufficient in overseeing the vital and fatal operation of the banks. Fig 2: Lending of the Landsbanki bank (source Iceland central bank) The aim problem of the bank is to determine what led to its collapse. One of the main problem that led to the collapse of the bank may be attributed to the privatization. Landsbanki was a nation bank and should have remained a reserve of the government and the public. In this case, the government could have monitored the operations of this bank closely that it could have noticed its collapsing elements. Nonetheless, the new leadership of the bank should map and profile as well as valuate the assets that attached to the banks before it resumes to active operations. If possible the bank should stop some of its international operations especially in the regions that it’s having immense diplomatic problems following its bankruptcy situation. Lower rates of mortgaging is also a factor that is likely to have contributed to the collapse. Providing loans means the bank is giving off the money and if these people take too long without refunding the bank and bank’s operations are on the rise including expanding its subsidiaries and lack of close supervision and regulations on these actions were dangerous moves to the banks and its stakeholders. Finally, it is worth noting that the actions of the main player of the country’s economy, the Icelandic government also led to the misfortunes of Landsbanki. During the period of its collapse, the government’s monitory policies made the economy of the country vulnerable despite the obvious signs of rising inflation. Regardless of these factors, Landsbanki had poor leadership who seemed to have been making vital organizational decision on excitements. For instance, following registering improved profit after tax for 2005 compared to 2004, they decided to increase dividends with a hooping 104 per cent without first studying and analyzing the current economic environment to help them predict the future. It should be noted that the bank among other banks and financial institutions were not transparent in the accounting information and this is also a leadership problem. In essence the bank might have been making loses, but with the aim of building on the investors’ and customers’ trust, they might have been providing and acting on wrong financial information. For instance, they might have provided false information regarding their profits thereby increasing dividends on the same; thus, leaving the bank without funds to operate. Fig 3: the 2007 pre- tax profit of the bank Following the fact that the bank had no funds to conduct its businesses and most of the businesses and banks that somewhat supported its operations had collapsed in the United States’ Lehman Brothers, the bank could not operate and FME took control of it. Additionally, the new management of the bank must ensure that it repossesses its frozen international assets specifically the UK assets. Some of the immediate measures that Palsson and his team must consider undertaking in restoring the reputation and effective operations of the bank include integration of the bank’s social responsibility especially in making investment decisions. The bank must have credible and effective approach in handling contentious issues in responding to the investors’ concerns. The social responsibility should aim at restoring the image of the bank to the public. Hence, Palssonneed to relay the bank’s empirical information so the investors and all the bank’s stakeholders to know the exact financial position of the bank. It is through information provided to the regulators and stakeholders make vital decision on the operations of the bank. Palsson must also allow the vital decisions of the bank to relate perfectly with the economic environment within the bank’s areas of operation. Notably, other than economic environment, the banks current and future decisions be it long or short term must also respond or factor the social and political environments. With such considerations, Palsson must control capital investment on foreign assets, reducing the companies listed on the Icelandic stock exchange listed on the bank’s equities. Recommendation Banks are very vital financial institutions that should be safeguarded from any form of failure or collapse. The management of all banks must usually ensure that investors and depositors among other customers’ finances among other assets are never at any risk. This state of financial soundness can only be achieved through sound management decisions. Such decisions must be made not on assumptions or false data but on the actual state of events. In addition, the management must incorporate all the stakeholders where necessary to ensure that they provide proper guideline to the management and operations of the bank. Therefore, Palsson must always incorporate the social, environment, and governance concerns towards analyzing of the bank’s investment objects for him to gain holistic overview of the operations of the bank towards identifying risks and opportunities in every decision to be made in operating the bank either on short or long term basis. Most importantly, he must ensure that all the social risks are assessed with the same principles of assessing financial risks and treat all risks to be having equal threat to the bank. Appendix 1 The chart indicating the distribution of Landsbanki’s assets by region by 2008 Appendix 2 The chart indicating the distribution of Landsbanki’s pre-profit by 2008 business segments Appendix 3 The graph showing how the bank performed in 2008 Appendix 4 The above graph shows the financial state of the financial state of the Landsbanki’s branches in different country. It is apparent that the 2006 was not a good year for the bank. It is predicted that during this year that things started running out of control for the bank. Read More