In establishing Landsbanki, the Icelandic parliament hoped to boost monetary transactions and encourage the country's nascent industries. Following its opening on 1 July 1886, the bank's first decades of operation were restricted by its limited financial capacity; it was little more than a savings and loan society. Following the turn of the 20th century, however, Icelandic society progressed and prospered as industrialisation finally made inroads, and the bank grew and developed in parallel to the nation. In the 1920s Landsbanki became Iceland's largest bank, and was made responsible for issuing its bank notes. After the issuing of bank notes was transferred to the newly established Central Bank of Iceland in 1961, Landsbanki continued to develop as a commercial bank, expanding its branch network in the ensuing decades.
Liberalisation of financial services, beginning in 1986, opened up new opportunities, which the bank managed to take advantage of despite some economic adversity. In 1997, Landsbanki was incorporated as a limited-liability company, and the ensuing privatisation finally concluded in 2003. Landsbanki now operates as a privately owned bank, competing in a free market, with substantial international activities added to its traditional Icelandic operations.
1886–1895: Banking as a sideline Created by an Act of the Icelandic parliament, Althingi, Landsbanki Íslands commenced operation on 1 July 1886, when it opened on the street known as Baker's Hill (Bakarabrekka), later called Bank Street (Bankastræti) in the centre of Reykjavík.
The bank's establishment was intended to boost monetary transactions and the country's nascent industries. For most of the 19th century Iceland had neither a monetary institution nor financial services. Money could be sent to Denmark for safe custody, e.g. by purchasing state savings bonds. Loans could only be obtained, if at all, from well-off individuals, while merchants could only be convinced to loan goods on credit.
The frequently heard complaint of a "money shortage" referred both to the lack of credit and a lack of currency to pay what could not be paid for in produce, such as stockfish, wool or butter. The establishment of savings societies alleviated the situation only slightly, as did loans made by the national treasury from its reserves; this was an emergency fund, intended to provide relief in times of difficulty or economic setbacks. But the country sorely needed a real bank, and no Danish banks were tempted to open a branch in Iceland. Danish experts advised instead that an Icelandic bank be established, and the recently re-established Icelandic parliament was quick to grasp the opportunity.
The Act establishing Landsbanki Íslands entrusted the National Treasury to issue banknotes, which served as the bank's funding. Although this was the era of banknotes backed by gold, Icelandic treasury notes had no such backing and could not be redeemed. They could, however, be used to pay taxes and other levies. Limiting note issuance kept the currency on par with gold-backed Danish notes, and managed to substantially improve the country's shortage of cash.
Lárus E. Sveinbjörnsson, a high court judge, worked part-time as the first managing director of the bank, as did its comptroller and cashier. The first spring after it opened, the Bank was augmented by the acquisition of the assets and goodwill of the Reykjavík Savings Bank (Sparisjóður Reykjavíkur), the largest in the country. By far the greatest share of the bank's operating capital was invested in long-term mortgages; its only services consisted of accepting deposits and granting loans. The bank was a profit-making venture; its costs were low and its low-risk loans granted with a hefty interest rate spread. Soon it had managed to collect a sizeable reserve, but its impact was less than hoped for. Residents living outside of Reykjavík soon complained that there were no signs of the local branches promised in the parliamentary statute. The capital's own citizens were far from satisfied with having the bank open only for several hours, two days a week and in 1889 daily opening hours were introduced. Two years later, the wages of the bank's employees were raised to reflect their longer working hours, making them Iceland's first banking professionals. In 1893 Lárus Sveinbjörnsson consequently returned to the High Court and a full-time managing director, Tryggvi Gunnarsson, was appointed.
1896–1905: Head office built and branches opened Tryggvi Gunnarsson put his many years of political and business experience to good use in expanding Landsbanki's operations. He developed contacts with foreign banks, so that the bank was able to offer inexpensive international money transfers, While the majority of lending was still real estate mortgages, some credit was provided for expansion in fisheries, where larger, decked fishing vessels were appearing.
Just prior to the dawn of the new century, the stately Landsbanki headquarters (costing half of the bank's reserve funds) opened on the corner of Austurstræti and Pósthússtræti, where the Bank has remained to this day. The imposing Neo-Renaissance style of the structure made it "quite the equal of such premises in the world’s great cities". Landsbanki's operations grew steadily – not least following the establishment of a mortgage department, which could grant credit secured by real estate other than farm property. Funding for these loans was obtained by issuing the bank's first bond series, sold both in Iceland and Denmark.
This enabled Landsbanki to increase lending to industry, making its operations more like a real bank rather than a savings and loan society. A few years into the new century, the parent bank in Reykjavík was well enough established to expand, opening an Akureyri branch in North Iceland in 1902 and another in Ísafjörður, in the West Fjords, in 1904. During its six years of growth in the new century, its balance sheet increased sixfold. Despite the advent of a new competitor: a privately owned bank, Íslandsbanki, mainly owned by Danish investors, appeared on the scene in 1904 and launched its operations by opening three branches.
While Landsbanki had done its best to provide credit for upgrading of the fishing fleet with decked vessels, its funding was limited during these early years and clearly constrained the fishing industry's development. Just prior to the turn of the century, Danish financiers offered to take over the bank, strengthen its financial basis and list in on the Danish stock exchange. The new bank would serve as a central bank for Iceland, issuing notes backed by gold, as was the practice in other countries. A hot dispute among Icelandic politicians as whether to accept or refuse this offer, was concluded by the Althingi's adoption in 1901 of an act authorising the inception of the new bank – but refusing to have it take over Landsbanki.
This gave the investors second thoughts, as many doubted there was scope for two banks in the small nation. Íslandsbanki did eventually open, however, the same year as Home Rule began in Iceland, and at the same time as motorised fishing vessels and commercial trawlers were beginning a revolution in the country's fisheries. Íslandsbanki was well funded and, despite being a privately owned bank, had exclusive right to issue banknotes backed by gold. It concentrated on lending to industry, especially to larger merchants and the fisheries sector, providing Landsbanki with stiff competition.
1906–1915: Weathering the storms Subject to the control of parliament and the cabinet, Landsbanki has more than once been the focus of political disputes. A change in government in 1909 meant difficulties for Tryggvi Gunnarsson, Landsbanki's managing director and prominent member of the outgoing Home Rule party led by his nephew, Hannes Hafstein. Within a year Hafstein's successor, Björn Jónsson, dismissed Gunnarsson, together with the bank's two appointed supervisors. He followed up by appointing a fellow Independence Party member, the merchant Björn Kristjánsson, as managing director of the bank. Soon it was decided to divide responsibility for the bank's affairs between two men, and two directors were appointed.
Both the Minister's motivation and methods brought forth highly vocal criticism, and eventually his party split and he himself was forced to step down following a vote of no confidence. Landsbanki emerged from the disputes relatively unscathed; it would subsequently have three managing directors, appointed on a party political basis, partly reflecting the balance of political power. It did not, however, escape a major fire in central Reykjavík in 1915, which destroyed Landsbanki's headquarters plus another 11 buildings. The bank's accounts, valuable documents and its notes and coin were saved, however.
1916–1925: In temporary premises Following the 1915 fire, Landsbanki was provisionally housed across the street in the main post office and the Reykjavík Apothecary. Despite the cramped and less than suitable quarters the bank continued to grow, opening branches in Eskifjörður in the East Fjords and Selfoss in South Iceland in 1918.
During the economic upheaval caused by World War I countries abandoned the gold standard. The currency issuer in Iceland, Íslandsbanki, was authorised to issue Icelandic krónur notes not backed by gold, but which it was to keep at par value with Danish kroner. Which Íslandsbanki could not manage, as both banks' activities during the post-war years especially reflected the country's economic difficulties and plummeting prices for Icelandic exports. The major economic crisis caused widespread defaults on loans, especially at Íslandsbanki. It lost its monopoly to issue banknotes and after a two-year dispute the question was resolved and Landsbanki was granted this right. From 1924 onwards, Landsbanki regained its vitality and re-opened in new and even more imposing premises built on its former Austurstræti location. The building was designed by State Architect Guðjón Samúelsson and decorated with murals by painters Jón Stefánsson and Jóhannes Kjarval.
1926–1935: The country’s leading bank By the beginning of 1927, Landsbanki had become Iceland's largest bank. Its financial situation was considerably more solid and the government was prepared to do its part to strengthen the state bank rather than a foreign-owned private bank. An act of parliament passed later that year formally made it the country's national bank, with a new central bank division created alongside its commercial bank and mortgage lending operations. The bank's board of governors was to be composed of five members, four of them elected by Althingi and a fifth, the chairman, appointed by the Minister. Amendments to the act a year later included a state guarantee for the bank's obligations, including deposits, adding to its advantage over Íslandsbanki. The first bank branch in Reykjavík opened in 1931, adding to Landsbanki's contribution towards keeping the wheels of business and industry in motion after the Great Depression had reached Iceland.