Episode Details

This episode dissects the three-layer stress test a fixed income portfolio manager should have applied: reserves-to-short-term-foreign-liability ratio, guarantee fund coverage ratio, and CDS-to-rating divergence as a leading indicator. We also dissect the incentive architecture that kept Icelandic bank paper investment grade through Q2 2008 — and why the same analytical gap is present today in any portfolio with exposure to banks in small open economies with large financial sectors relative to GDP.

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In the first half of 2008, every number needed to exit Icelandic bank exposure was publicly available. The central bank's reserves were published monthly. The banks' short-term foreign currency liabilities were in their annual reports. The Icesave guarantee fund had €69 million behind $8 billion in retail deposits. The CDS spreads were diverging from agency ratings at an accelerating rate.

Iceland 2008 | sovereign backstop | wholesale funding dependency | CDS spreads | Icesave guarantee | credit default swap | GP LP analysis | fixed income due diligence | institutional risk | Kaupthing Landsbanki Glitnir | financial autopsy | reserve adequacy | bank credit analysis | emerging market risk | financial forensics

Every collapse has a pattern. We dissect it. Layer by layer.— Financial Forensics Labs