Liberalisation of the financial sector iceland - Essay Example

The banks in general did not have to worry too much about the competition and customer satisfaction philosophies as the banks had been working under national regulation as part of the public sector. Earlier, Icelandic banks did have international offices to support the domestic customers, e.g. Kaupthing bank's filial in Luxembourg and New York; however most of the business was domestic orientated. Today 70% of profits of Kaupthing bank, the third largest in Iceland, are made outside Iceland - a significant change (Annual rapport 2006, Kaupthing Bank p4).

Iceland is an island with many small isolated towns; therefore the cost of having many filial is considerably high. But in view of the local needs, it was a necessity (Jensen 2003). The liberalization process has contributed immensely towards expanding the domestic financial markets. Today the major credit institutions such as pension funds and house founds, which used to be separate units earlier, are today merged with the new commercial banks (sector rapport OECD p43). Therefore the banks have now changed from being mere saving banks to financial institutions (FIs) with a wide portfolio of services from lending money out to holding pensions.

Though government still controls the larger household funds, whose job is to lend out money for buying houses. This is seen as a secure investment. In addition it also provides short-term credit for households and businesses as is provided by commercial banks. The longer term financing for both business and housing is largely provided by government investment funds drawn from their resources in private sector pension schemes and foreign borrowings.The Icelandic financial institutions are divided into three main groups, banks, pension funds and government credit funds.

The government credit funds can be further divided into 3 minor groups, (insurance, leasing and mutual funds). Looking on the graph at appendix 5 we can see that the pension funds and the banks have the biggest share. The foreign sector who supplies outstanding credit to government and its credit funds -also figures as a dominating group.Controlling of the financial market doing liberalizing periodBefore the liberalisation process, the government was in control of most of the financial institutions in Iceland including the banking sector.

The sectors were missing out on reforms process and modern agreements. The financial sector had more in common with a regulated Pan Atlantic country than the rest of north Europe. This was also due to a smaller economy where the government wanted to protect it against foreign exchange speculations dealers. Iceland has undergone through several years' of weak economy with a high rate of inflation and strong devaluation of its currency. Some of the Icelandic Banks also suffered huge losses while being a part of the public sector.

Owing to such losses the Islandsbanki became insolvent in 1995 (Jensen 2006 p7).Banking sectorToday, there are 24 smaller 'saving banks' and 3 'major banks' in the financial sector in Iceland. The three banks, Kaupthing Bank, Landsbanki Bank and Glitnir Bank are dominating the