Return to Landsbanki guernsey fiasco


GFSC ANNUAL REPORT – Banking Division -- 2009

Selected sections from the report with comments on those sections which refer to the 2008 banking crisis and in particular to landsbanki Guernsey.

CHAIRMAN’S STATEMENT (selected portion) Page 10 of the report

One of the important regulatory lessons to be gained from the recent

fi nancial crisis is the importance of establishing effective regulation

at a macro level and maintaining active cooperation and assistance

amongst national regulators. This is a theme that the Commission

has repeatedly drawn to the attention of the world regulatory bodies

in the light of its own experiences in dealing with Northern Rock and

Landsbanki. The Commission has continued and will continue to

build up its own regulatory network. During 2009 the Commission


COMMENT What is being said above is that there was no regulation at macro level prior to Landsbanki Guernsey going into administration, and as has been shown by reports supplied by LGDAG, huge reliance was placed by the GFSC on information supplied by the FSA to the detriment of their own due diligence and certainly to the detriment of the landsbanki Guernsey depositors. This is confirmed by the letters entered into evidence at the Treasury select committee hearing that passed between the then Director General Peter Neville and his counterpart at the FSA. Closing the door after the horse has bolted comes to mind.


DIRECTOR GENERAL’S STATEMENT (selected portion) Pages 12 ,13 & 14 of the report


The Commission has long felt that the States should establish

a financial services ‘ombudsman’, but the States, in that process,

need to recognise that Guernsey’s legal regime is inadequate to be

protective or supportive of the retail consumer, not only in financial

services. Anticipating this greater focus on retail services, I have

constituted a working party within the Commission to consider

the possibility of establishing a ‘retail’ financial services Division,

to address the sector’s particular circumstances, problems and

requirements, and to ensure that those who deal with the public in

the sale of financial services products do so to the highest standards

of probity.


COMMENT  Further shutting of the door after the horse has bolted. This is where the States of Guernsey have been totally lax over the years by not accepting the GFSC’s consultation document back in 2002 for the introduction of an Ombudsman and a depositors compensation scheme, thinking that the worst would never happen again. When at last they started waking up in 2008 in introducing a Depositors Compensation scheme, it was already too late for the landsbanki Guernsey depositors and was not back dated. When one looks back, Guernsey’s retail bank customers have been shamefully treated, compared with other jurisdictions.

The current scheme is totally inadequate and now a new European initiative is putting up protection to €100,000, making Guernsey’s positively stone age.





The aftermath of the crisis  page 17 of the report

After the turmoil of the banking crisis of October 2008 and the

unsettled markets at the end of that year which had produced

a flight to quality in the banking sector, there was a fragile but

gradual recovery in financial markets in 2009. However, market

pressures remained on several institutions and regulators continued

to take remedial actions. Deposit levels in Guernsey declined from

£157 billion to £117 billion as the flight to quality and precautionary

behaviour of the crisis period were gradually unwound. The period

was characterised by a massive recapitalisation of major banks by

governments in the UK, the USA, the Netherlands and Germany and

huge injections of liquidity into the financial markets. There was a

slow economic recovery through the year. However the significant

injections of liquidity and measures taken to assist the economic

recovery also led to a period of historically very low interest rates.

That itself had consequences on depositor behaviour. In particular

it impacted the attractiveness of Swiss fiduciary deposits and

aggregate levels of these decreased steadily throughout 2009 from

£72 billion to £42 billion, as it was no longer attractive for ultimate

depositors in Switzerland to give instructions to place these deposits

in Guernsey because the fee outweighed the interest benefi t from

the transaction. By the end of the year Swiss fi duciary deposits had

declined from 46% of the deposit base to 36% of the deposit base at

December 2009.

At the start of 2009 the Promontory Report produced by Mr Michael

Foot on the Commission’s handling of the events leading to the

administration of Landsbanki (Guernsey) Limited (LGL) was put in

the public domain. That report concluded that the Commission had

acted appropriately, had measured up to good practice and that

there had been no regulatory failure. The report also recognised that

actions taken by the Commission in 2008 were directly benefi cial to

the interests of LGL’s depositors. The Commission had required LGL

to reduce its direct exposure to Iceland substantially and required

the bank to replace assets upstreamed to the parent in Iceland with

third-party bank placements, placements with Heritable Bank Ltd

in London and a portfolio of third-party loan assets, which resulted

in LGL acquiring a credit portfolio of property loans.


COMMENT  There has not been an independent report instigated by the Guernsey Government who tend to ride on the back of the very superficial report by the Promontory group, Commissioned by the GFSC, under its own terms of reference and paid for by them. An internal report without external witnesses giving evidence on oath or the capability of compulsory production of documents. No wonder its conclusions suited the GFSC & Guernsey Government.


“The report also recognised that

actions taken by the Commission in 2008 were directly benefi cial to

the interests of LGL’s depositors. The Commission had required LGL

to reduce its direct exposure to Iceland substantially and required

the bank to replace assets upstreamed to the parent in Iceland with

third-party bank placements, placements with Heritable Bank Ltd

in London and a portfolio of third-party loan assets, which resulted

in LGL acquiring a credit portfolio of property loans.”


By placing the funds with Heritable, they were exposing them directly to Iceland as the £40million (approx) of LG depositors money from Guernsey,  placed with Heritable, was not ring fenced and Heritable were still reliant on Iceland for liquidity. When Landsbanki Guernsey went into administration as did Heritable, that £40 million became part of the overall pot. When they mention third party bank placements, the third party was not really a third party but a part of Landsbanki islands hf in Iceland.

The statement is very misleading and tends to put the GFSC in a better light for something that should never have happened in the first place. (Read The 17page report by Matthew Dorman who explains the situation much better, it was presented to the Policy Council , who ignored it)

The only ring fenced area was the loan portfolio, which the administrator has been slowly selling off to the maximum benefit of the depositors.


ADDENDUM 2 Sept 2010: In Mr Van Leuvan's reply to the LGDAG on 26th August 2010 he has changed the wording used in the report above and given it a new meaning 

ABOVE:required the bank to replace assets upstreamed to the parent in Iceland with third-party bank placements, placements with Heritable Bank Ltd in London and a portfolio of third-party loan assets, 

 Taken to mean with Third Party Bank Placements the third party placements meant Heritable Bank ltd  and  everyone spoken to read it that way.

Mr Van Leuvan's subtle change in his letter to the LGDAG of 26th August 2010:

"With Third party bank Placements, and Placements with Heritable Bank in London." thus the meaning now does not claim Heritable as a Third party Bank.

So The GFSC's annual report is very ambigious to say the least in that respect.


 As a result of

those actions, the Joint Administrators of LGL were able to recover

assets successfully and begin to repay depositors whose funds were

temporarily frozen as a result of the administration process. During

the course of 2009 the Joint Administrators made a series of stage

payments to depositors following their recovery of assets and, at

the end of 2009, they announced that they would make a further

payment in early 2010 which would take the amount returned to

depositors to 67.5p in the pound. The Joint Administrators also

estimated that they expected, if the recovery of assets went as

they had projected, to be able to recover up to 91p in the pound for

LGL depositors.


COMMENT  If the depositors are very lucky, they may get between 85 & 91% over a number of years, no thanks to the GFSC (20 months already) 67.5% has been returned, but the returns are getting smaller and further apart and a number of depositors have died already and will never see their money.



The aftermath of the crisis (continued)

The then Director General and the Chairman (together with

the Chief Minister) attended the UK Treasury Select Committee

hearings on the Icelandic Bank crisis in February in order actively

to seek to protect the interests of Guernsey depositors. The

presentations and discussion included the response of the

Guernsey authorities, the actions taken leading up to the

administration of LGL and the obstacles they had to face.

The appearance before the Treasury Select Committee was

accompanied by the publication of an exchange of correspondence

between the Commission and the UK Financial Services Authority

in the critical period leading up to LGL going into administration.


COMMENT  A series of letters that had passed between Peter Neville and his counterpart in the UK FSA in January 2009. The letters were exchanged  three months after Landsbanki Guernsey went into administration not the critical period leading up to the administration, their contents on the other hand reffered to the dealings with the FSA prior to the administration. These letters would normally have been confidential but were requested as evidence by the Treasury select Committee. They clearly showed that the FSA had been holding back on the GFSC and that the GFSC (reading between the lines) had been placing their whole faith in the FSA rather than doing their own due diligence, as there was plenty of evidence out there that should have worried them months before. As The Isle Of Man Treasury Minister said at their select Committee hearing. “We were collateral damage to the interests of the UK Government.” So was Guernsey.


During the early part of the year the newly formed Board of the

Guernsey Deposit Compensation scheme was established and it

met to establish its immediate objectives and procedures. In April it

issued a leafl et, which was widely distributed, to explain the features

and limitations of the scheme. The Commission provided comments

and feedback on that document but it is not part of the ongoing

work of the Board.


COMMENT As was found out when technical questions were put to the GFSC regarding the scheme and those putting them were told to consult an advocate. The  scheme is inadequate and it will be interesting to see if more money flies from Guernsey when the new European scheme of €100,000 comes in. There is a page on the Guernsey Depositors Compensation Scheme on this site. 


The impact of the crisis-driven acquisitions and enforced

government or partial government ownership of banks licensed

in the Bailiwick became evident during the course of the year. This

was accompanied by selective redundancies and redeployment

of staff in several institutions but in general terms during the

year there were no major reductions in staff levels in the banking

sector. Those banks which were subject to government ownership

undertook strategic reviews and in the main refocused on their core

businesses. RBSI took the decision to exit over a reasonable period

from a previously specialist business but remains committed to its

other specialist business lines. Lloyds Banking Group surrendered

the licence of Bank of Scotland plc and integrated that activity into

the main Guernsey branch of the bank. Fortis Nederland, which had

disengaged from Fortis Belgium in the wake of the crisis, focused

on its core wealth management businesses and subsequently

rebranded itself as MeesPierson (CI) Limited. Northern Rock

Guernsey Limited participated in the parent bank’s restructuring

and late in the year NRG became part of the continuing bank

Northern Rock PLC, which had been disengaged from Northern

Rock Asset Management Ltd, the entity which contained the most

critically impaired mortgage assets.

The fi rst quarter of 2009 can now be seen as a continuation of

the worst global financial crisis since the Second World War. This

was a period of intense activity for the Commission. It involved the

Commission undertaking heightened surveillance of several banks,

and indeed on macro-economic conditions in general, including

monitoring the UK property market. The Commission maintained

close contact with key parental banks and key home supervisors,

involving many face-to-face meetings.


As a consequence, the Commission continued its policy from 2008

of requiring several Guernsey banks to have in place additional

mitigation which served to protect the interests of Guernsey



COMMENT After the horse had bolted and the GFSC were involved in “damage limitation”, mostly to their reputation. Remember when Landsbanki Guernsey bought Cheshire in 2006, GFSC even failed to ensure the Guarantee from the mother Company landsbanki Islands hf had been signed. The Icelandic Winding Up Board have now refused priority status to landsbanki depositors, although the UK have managed to gain that status for themselves.


 Apart from reducing the risks in 2009, this activity has

resulted in a more long-lasting reduction in the exposure of the local

banking sector to external risk, although the risk to the sector will

always be exogenously driven. In particular, sovereign risk embedded

in parent banks’ ownership of Guernsey subsidiaries has been

notably reduced.

The credit quality of loans to local individuals and businesses held

up well, with a very low level of non-performing loans refl ecting the

fact that employment levels were maintained during the year. The

Commission undertook a credit quality and provisioning survey to

determine the extent to which there had been further impairment

as a result of the recession and a further need for provisions. Whilst

more credits had moved to watch list status, the level of nonperforming

loans across the whole loan portfolio remained modest

and manageable. However, as a result of the crisis some banks had

to make provisions for the impairment of severely damaged assets,

in particular asset-backed securities and holdings of the most

seriously weakened credits, such as Lehman Brothers and the

Icelandic banks.

Not surprisingly, profi tability remained challenging for Guernsey

banks in 2009 because of compressed interest margins, which

put pressure on their net interest income revenue streams. Threequarters

of Guernsey-licensed banks reported lower profi t levels

than in 2008. That said, a quarter had improved or maintained the

same performance. During the course of the year several other

banks surrendered their licences in addition to Bank of Scotland.

Credit Europe (Suisse) S.A. – Guernsey Branch decided to close and

the Bank of Ireland (I.O.M.) Limited – Guernsey Branch transferred

its business back to its Isle of Man parent. As a result of a merger in

the UK in which Scarborough Building Society merged with Skipton

Building Society, there was a consequential effect in Guernsey which

subsequently resulted in Scarborough Channel Islands Limited

merging with Skipton Guernsey Limited. The combined entity was

renamed Skipton International Limited. At the end of the year the

National Bank of Greece decided to close its operations in Guernsey.

We expect further selective surrenders of licences during 2010,

refl ecting further rationalisation and focus on core business by

international banking groups.


External and international policy developments  Page 20 of the report

In March 2009 Adair Turner, Chairman of the UK Financial Services

Authority (FSA), published his comprehensive analysis of the causes

of the 2008 global financial crisis in a document which became

known as the Turner Review. That document subsequently became

the basis for a discussion paper published by the FSA entitled

“A regulatory response to the global banking crisis”. The seeds

were sown in the consultation document for robust proposals on

liquidity management for UK banks, which were incorporated into a

document “Strengthening liquidity standards” published in October

2009 and setting out for UK banks a new liquidity standard which

was scheduled to come into force in 2010. The Commission is in

discussion with the FSA and affected UK-owned subsidiary banks

about the implications for their future business models.

Later in the year, in December, the Basel Committee on Banking

Supervision published its consultation document on liquidity

standards under the title “International framework for liquidity

risk measurement, standards and monitoring”. That was issued in

the context of another consultation document issued in tandem

and covering a wider spectrum of capital and liquidity adequacy

issues, entitled “Strengthening the resilience of the banking sector”.

The latter covered proposals for tightening the defi nition of capital

to give more emphasis to high-quality Tier 1 capital together with

proposals on capital leverage (sometimes known as gearing), capital

buffers and liquidity.

Just after the publication of the Turner Review, in April 2009 the UK

House of Commons Treasury Select Committee published its report

on the banking crisis: “The impact of the failure of the Icelandic

banks”. In general terms this recognised the need going forward for

more effective cooperation and communication between home and

host supervisors.


COMMENT A total understatement, its a pity GFSC were too naive to realise the UK FSA was self serving during their dealings in 2008. Perhaps if they had carried out more due dilligence themselves, things would have turned out differently for the Landsbanki Guernsey depositors.


Separately, in October 2009 Mr Michael Foot, who was commissioned

by HM Treasury, published his Final Report of the Independent Review

of British Offshore Financial Centres. This covered developments

in the three Crown Dependencies and the six British Overseas

Territories. That report examined the sustainability of existing

business models and fi nancial sector crisis management and

resolution arrangements. It also drew attention to the adequacy of

transparency in depositors’ compensation schemes and depositors’

understanding of the limitations of the newly created schemes.


COMMENT The LGDAG pointed this out very early on with regard to the Guernsey scheme. I still don’t think there is a document that explains in layman’s language the inadequacies of the scheme and that you may not get back anything like £50,000.


Local policy initiatives page 21 of the report

In Guernsey in the wake of the 2008 banking crisis the Commerce

and Employment Department commissioned Beachcroft, a

consultancy fi rm, to review from a strategic point of view the future

of the banking sector in Guernsey. In particular, it addressed the

nature of banking in Guernsey and whether that was aligned with

the need to maximise value added and its contribution to gross

domestic product and to manage the risks in the sector, including

the risks to the jurisdiction through potential reputational damage

from the possible failure of a Guernsey bank. Clearly the Northern

Rock experience and Landsbanki Guernsey Limited going into

administration provided the backdrop to that exercise. Beachcroft

produced its report in November entitled: “The Hunt Review:

success and stability”, with the subheading: “A strategic review of

Guernsey’s banking industry”. Broadly, its conclusion was that there

continue to be significant risks to Guernsey’s reputation and the new

Deposit Compensation Scheme from the activities of retail deposit gathering


COMMENT I think there is little doubt that Guernsey has suffered world wide damage to its banking reputation and will continue to do so. Most of this has been brought on by its own very bad handling of the situation from the time the GFSC officiated the sale of Cheshire Guernsey to Landsbanki and failed to get the guarantee signed to their lack of due diligence in the months prior to landsbanki going into administration and the abysmal way the whole thing has been handled by Guernsey’s Chief Minister over the last 20 months. All of these things go around and around the world on a regular basis in news reports and websites and will continue to do so until the landsbanki Guernsey Depositors get all of their money back. 1600 Depositors and their families around the world have nothing but detrimental comments to make about Guernsey, it’s Government, its financial regulator and the way it handled the crisis.


 The review suggested that Guernsey should switch

its emphasis away from straightforward deposit gathering to a

more value-added offering, principally in the private banking and

wealth management arenas. Lord Hunt’s recommendations on

retail banking were consistent with the Commission’s own thinking,

which reflects a change in our risk appetite that, henceforth, we

would prefer retail banking customers to be in systemic banks which

overseas governments are ready and willing to support. The Hunt

Review was also cognisant of the then recent proposals from the

UK regulator to adopt a more robust liquidity regime such that Ironed

subsidiary banks supplying liquidity to the home bank were

penalised for the upstreaming elements in that funding. The review

addressed a range of issues, including resourcing and the operation

of administered banks, and was cautious about the establishment of

indigenous banks in the island.

In the context of the Hunt Review’s endorsement of private banking

and wealth management as the way forward for Guernsey, the

Commission has maintained an open mind in respect of requests

for a change of controller from initially bank-owned subsidiaries.

Post-crisis we have had to address a proposal for the ownership

of a bank to transfer to private equity ownership. Given the need

to recapitalise the whole global banking sector massively, the

Commission is conscious that there is a need to accept that reputable

private equity funds will be a valid source of bank capital in the years

to come. That said, in looking at specific proposals involving the

change in ownership from current bank ownership to private equity

ownership, the Commission has insisted on the achievement of a

very strict range of conditions and requirements in order to mitigate

the risks from a changeover of ownership and any possible change

in perception in the market place driven, for example, by the views

of rating agencies.

During the course of the year the Commission had to maintain the

momentum in its supervisory review and evaluation programme

(SREP) in its review of the capital planning exercises undertaken

by banks through their Individual Capital Adequacy Assessment

Programmes (ICAAPs). The ICAAP is a fundamental part of the new

Basel II Capital Adequacy regime. That exercise, which engages

subsidiary banks only and not branches, nevertheless involves a

considerable amount of resource commitment at the Commission

and has involved an extended dialogue and feedback with Guernsey

subsidiary banks. Clearly there were elements of a learning curve

both for regulators and for banks, but we have learned from the

feedback exercise undertaken that the banks found the exercise

productive and invaluable in terms of their understanding of

the risks in their business and how they manage those risks. The

outcome of the fi rst round of ICAAPs was that Basel II had in fact

strengthened capital levels in Guernsey in 2009 as well as capturing

a wider range of risks better. Overall, despite the crisis, capital levels

at Guernsey banks have remained well in excess of regulatory

minima. Tier 1 capital stood at £2,094 million at the end of 2009,

as shown in fi gure 1.


Local policy initiatives (continued)

Against the background of an overall 25% decline in deposit levels

at end 2009 there were some significant changes in the source of

deposits (Table 1). Switzerland remained the largest single source

but contracted from 48% to 39%. Guernsey increased in importance

as a source of deposits, climbing from 18% to 28%, mainly reflecting

deposits from corporate funds but also an increase in intragroup

inter-bank deposits in the jurisdiction. Other movements in the

source of deposits since 2008 were minor. The overall picture can

be seen in fi gure 2. By contrast, the changes in the disposition

of bank assets were less marked, albeit reflecting the same

contraction in the total size of the book. Assets placed in the UK

– largely intragroup placements – grew slightly in proportional

terms, increasing from 37% to 39%. Assets placed within Guernsey

were up from 4% to 8%, in part refl ecting the fi nancing of local

businesses and Guernsey funds, but also reflecting the placement

side of the intragroup inter-bank deposit mentioned above. Assets

placed in Switzerland were down from 15% to 10% as Swiss banks

based in Guernsey faced a reduced need to place assets following

the contraction in Swiss fiduciary deposits. The overall picture of the

disposition of bank assets at end 2009 is shown in fi gure 3.

Further information on the composition of the Guernsey banks’

aggregated balance sheets as at end December 2009 is given in

fi gure 4, which analyses deposits by currency, and fi gure 5, which

analyses assets by broad asset type. Figure 6 analyses selected

loans and advances – corporate, retail and private client loans and

residential mortgages – on a quarterly basis over the last 2 years.

A historic perspective of the composition of Guernsey banks’ assets

and liabilities over the last 7 years is given in Table 2. The geographic

analysis of the country of origin of Guernsey-licensed banks at end

2009 is given in fi gures 7 and 8.

In July 2009 the Commission issued a paper on the management of

liquidity risk in banks and developed a programme for identifying

those banks which required enhanced liquidity management. Clearly

this reflects developments in the international regulatory community

requiring more robust regimes addressing the liquidity of banks. This

again focuses on subsidiary banks which will be required to maintain

very liquid positions, enabling them to cope with expected outfl ows

within 8 days and within 1 month of a trigger event, and they will be

expected to adopt stress testing to reflect prudent scenarios which

might result in extended withdrawal of funds by depositors, e.g.

in the event of a significant rating downgrade of the parent bank

by one of the leading external rating agencies. The Commission is

continuing a dialogue with Guernsey banks to agree appropriate

behavioural adjustments to take account of any inherent stickiness

of their deposit base as a result of their particular mix of business.

The crisis demonstrated clearly the current fi ssures in cross-border

banking supervision, especially for host regulators. In response, the

Commission was active in 2009 – and will continue this in 2010

– making a contribution to strengthen cross-border supervision

both through the Offshore Group of Banking Supervisors (OGBS)

and through a Basel working committee (the Cross Border Bank

Resolution Group) on which Guernsey represents the OGBS.


Other work streams

The Banking Division continued its programme of onsite reviews to

address compliance with, and the implementation of, the Handbook

for Countering Financial Crime and Terrorist Financing, which was

introduced at the end of 2007 and updated in June 2009. During

the course of the year the Division maintained its bilateral contacts

with other leading regulatory agencies and participated in several

colleges of regulators. It is important for us to participate in those

colleges at relatively quiet times in order to build up the contacts

and channels of communication to enable cooperation and

communication to take place without hindrance at times of stress.

The division was also involved in a stress testing exercise ahead of

the International Monetary Fund (IMF) visit in 2010 and in preparing

a comprehensive self-assessment against the Basel Committee’s 25

Core Principles. The IMF assessment against the Core Principles took

place in Guernsey between 3 and 14 March 2010.


FINAL COMMENT Peter Neville made a number of comments in the early days as to how they were doing all they could to assist the Landsbanki Guernsey Depositors. Of course when asked exactly what they were doing, it suddenly became confidential. The only constructive thing I believe he did was write a letter to someone in Iceland in the October of 2008, we never saw the letter or a reply and that’s really the last we heard of him except for the Treasury select Committee hearing and those letters trying to cover his own back in January 2009 between him and the FSA, those would never have come to light had they not been demanded by the Treasury Select Committee.