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In each of the three banks, the principal shareholders and their affiliated companies were among the biggest debtors, so the owners who controlled lending decisions were also its main beneficiaries. This turned the banks into financing vehicles for their owners' investment groups rather than independent lenders pricing risk.
The banks lent money, often against the shares themselves as collateral, to buyers of their own stock. The resulting equity appeared on the balance sheet as capital, but the bank itself bore the risk, so its real loss-absorbing buffer was far thinner than reported ratios showed.
After privatization in the early 2000s, Iceland's three main banks expanded through wholesale funding and foreign deposit schemes until their assets reached roughly ten times national output. When funding markets froze in 2008, neither the central bank nor the state could credibly act as backstop, and all three failed within days.