What was Landsbanki's business model and strategy Essay

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The 2008 financial crisis came with severe economic impacts that terrorized financial institutions around the world. This crisis was caused by extreme contraction of liquidity within the global financial markets that initially began in the United States and created a ripple effect around the world. Iceland was the worst hit of all the economies as three of its prominent banks faced closure while some went under receivership due to the disappearance of wholesale funding in September 2008. One institution that was heavily impacted was the Landsbanki Bank. Originally the National Bank of Iceland, Landsbanki was the oldest bank privatized in the early 2000s. Notably, the bank was widely known for its Icesave account that provided foreigners with high-interest rates whenever they made deposits (Nguyen, 2017). A mix of the illiquidity of its foreign reserves, poor risk management, and lack of a visionary strategy led to the collapse Landsbanki and its peers. The key lesson here is that banks should ensure their own liquidity are under favorable conditions, efficiently manage risks, and develop vital and working strategies to avoid collapse when faced with economic pressure.
What was Landsbanki's business model and strategy?
In a short time period, Iceland had created a banking industry that permeated borders and was internationally active. Its international banking sector was large, relative to Iceland’s very small economy. Again, Iceland had its own currency and such a business model was not viable. For instance, Landsbanki’s system assets, including liabilities was heavily defined in foreign currency. Because the bank had significant amounts of short-maturity foreign-currency liabilities, the bank required the input of a foreign currency lender that would stop funding illiquidity that would entirely collapse the nation’s banking system.
The Landsbanki business model was deeply rooted in deregulation, a process that began in the Icelandic banking sector in 1990. Deregulation accelerated following Iceland's decision to join the European Single Market after agreeing to join the European Economic Area (EEA) in 1994. Membership to EEA fostered the bank’s expansion to other territories within Europe through a “single passport” (Nguyen, 2017). Consequently, asset growth exploded with Landsbanki and other banks acquiring foreign subsidiaries. The bank’s total assets doubled in 2004 and in the following year, amid abundant liquidity globally. This growth significantly outpaced the economic growth. Notably, the bank’s economic growth can be largely attributed to the increased interconnection with Europe. The bank’s decision to increase interest rates in the early 2000s made borrowing expensive, however, it created an incentive for households and enterprises to borrow money in foreign currency (Nguyen, 2017). Also, t...