THE Government was last night facing calls for an investigation following claims that the UK authorities knew as early as April that the Icelandic banking system was in trouble – six months before its catastrophic collapse.
Channel 4 News reported that the Icelandic Central Bank approached the Bank of England in March for assistance to support its currency as confidence in its heavily-indebted banking began to ebb away.
The following month, Bank of England Governor Mervyn King was said to have asked the International Monetary Fund for an assessment as well as commissioning separate studies of Iceland's banks and its economy.
According to the programme, he subsequently turned down the Icelandic request for help telling the Icelandic Central Bank that the country's banking system was "far too large".
The issue was also said to have been raised by Icelandic Prime Minister Geir Haarde when he met Gordon Brown in Downing Street on April 25. Mr Brown was said to have advised him to ask the IMF for assistance.
In all, the programme said that the Icelandic Central Bank approached seven European central banks for assistance, with just three Nordic banks offering support.
On September 2, the Icelandic trade minister and the head of the Icelandic financial regulator were said to have asked Chancellor Alistair Darling whether the British operations of the Landbanksi bank could be turned into a UK subsidiary.
That would have meant that they would be covered by the UK deposit protection scheme, but no agreement was reached.
Just over a month later Iceland's banks dramatically collapsed. While the Government said that it would guarantee the deposits of private savers, dozens of charities, councils and other public bodies have been left not knowing whether they will get their money back.
Liberal Democrat treasury spokesman Vince Cable said that the Government now needed to explain exactly what it knew about the extent of the problems in the Icelandic banking system.
"What was so striking (was that) the Governor of the Bank of England had judged that the Icelandic banks were in such dangerous and volatile condition that it would be difficult to save them and yet the authorities ignored all of this information and as a result billions of pounds of LGA (local government authority), police, charities money has been lost," he told the programme.
"There is a need for an investigation and at the very least a proper statement of exactly what the British Government was told, when they were told and what they did."
The Treasury last night defended its actions. A spokesman said: "We are clear that we took the appropriate action to protect depositors and we continue to discuss the matter with the Icelandic authorities."
There was no comment from the Bank of England although it did refer to "funding pressures" on Icelandic banks in its six-monthly financial stability report published in April.