How Icelandic Banks Funded their Risky Business Models
Even after the mini-crisis in 2006, the Icelandic banks were able to fund themselves.
The banks had three primary funding sources:
1. Issuance of commercial paper and bonds
2. Foreign wholesale and retail deposits
3. Loans, including bilateral and syndicated loans, and money market lines from relationship banks.
Let's look at each of these sources in more detail.
Before the crisis, banks borrowed in foreign security markets at low credit spreads. These were unsecured bond issuances having maturity of 3-5 years.
After the crisis, the European debt securities markets became difficult to access. So, they shifted to US debt securities market. In the US markets, the Icelandic banks' securities were attractive as securities underlying the Collateralized Debt Obligations (CDO) issues.
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