“It was quite clear that there was a runaway boom going on. The currency was overvalued,” he said. So, instead of seeking business in Iceland, MP Bank looked overseas. “It was a natural reaction to diversify abroad and to not participate in lending for takeovers and for companies that wanted to expand,” Petursson said.

By 2007, fearing that things were getting worse, the bank began selling assets, mostly stocks, and buying Icelandic government bonds, which are now the bulk of its portfolio. It also started hoarding cash. “Of course, you could say that we were too conservative. We didn’t participate in the boom,” Petursson said. “But, we were doing sufficiently well.”

He may have gotten the timing wrong, but he was right about the impending problems. When the worldwide financial turmoil struck last October, MP Bank escaped the worst. “Our impairments were $15 million which was quite high,” Petursson said. “Still, we managed to squeeze out a profit of about $7 million.” For the year, the bank’s net operating income was 3.97 billion Icelandic krona, or $31.3 million, up from 3.16 billion krona in 2007. Its profit fell to 860 million krona from 1.78 billion krona.

During an interview by phone, Steingrimur J Sigfusson, the minister of finance for Iceland, said about MP Bank, “It did very well last year. It was probably the only one that did.” Last October, as the three biggest banks in Iceland failed and were seized by the government, MP Bank applied for and received its commercial banking license. It is now the only independent commercial bank in the country.

It is still quite small, however. At the end of 2008, it had 53.4 billion krona in assets, compared with 5.35 trillion krona in 2007 for Kaupthing Bank, the biggest bank in the country. MP Bank is trying to expand by taking advantage of opportunities created by the meltdown in Iceland’s banking system, but it has hit some roadblocks. After Spron Savings Bank, the largest savings and loan in Iceland, failed earlier this year, MP Bank offered to buy three of the bank’s branches. The deal has not been approved because all of Spron’s deposits have been transferred to Kaupthing. So, instead of buying Spron’s branches, MP Bank rented the largest one in May and hired 16 of the bank’s employees. Though bigger banks in Iceland remain open and fully operational, Petursson speculated that MP Bank was picking up customers because of the negative associations people made with failed institutions.

That competitive advantage may start to evaporate this month. On July 17, Iceland plans to recapitalise the banks it is overseeing as the first major step in a plan to make its banking system fully independent again.