Sir, Melvyn Krauss may be legally correct in saying that “the DNB [Dutch central bank] had no authority to block Landsbanki from opening a branch in the Netherlands” (Letters, January 19).

But that is not the end of the matter. The central bank could have asked much tougher questions and used its powers of delay. In the months before it approved a licence for Icesave many of the indicators of liquidity risk identified by the Basel Committee on Banking Supervision were flashing red for the Icelandic banks and for Landsbanki in particular. Already by late 2007 the credit default swap rate of Icelandic banks was very high, signalling that “the market” viewed them as very risky. If the market knew something was wrong, why not the Dutch central bank?

It is all the more puzzling, because the president of the central bank was also president of the Basel committee and closely involved in drawing up the liquidity risk assessment guidelines. Moreover, the central bank did not ask Landsbanki to provide a pool of liquid assets to be held locally – as Basel II rules require – until September 2008, just before the collapse.

Three conclusions follow. First, the DNB bears a not trivial share of blame for the Icesave debacle in the Netherlands, contrary to Prof Krauss’s assertion; it cannot present itself as innocent victim.

Second, this, when added to the argument of your editorial (“Do not put Iceland in a debtors’ prison”, January 7), strengthens the case for all three parties to agree to an international mediator, or at least to re-open negotiations. Third, European, and global, regulations must be changed to prevent a recurrence of the crazy situation in which a central bank has little authority to regulate a deposit-taking organisation but the citizens of its state bear the risks of its failure.

Robert H. Wade,
London School of Economics,
London WC2, UK