Icesave dispute


The Icesave dispute was a diplomatic dispute among Iceland, the Netherlands and the United Kingdom. It began after the privately owned Icelandic bank Landsbanki was placed in receivership on 7 October 2008. As Landsbanki was one of three systemically important financial institutions in Iceland to go bankrupt within a few days, the Icelandic Depositors' and Investors' Guarantee Fund had no remaining funds to make good on deposit guarantees to foreign Landsbanki depositors, who held savings in the Icesave branch of the bank.

History

When Landsbanki was placed into receivership by the Icelandic Financial Supervisory Authority, 343,306 retail depositors in the UK and Netherlands that held accounts in the "Icesave" branch of Landsbanki lost a total of €6.7 bn of savings. Because no immediate repayment was expected by any Icelandic institutions, the Dutch and British national deposit guarantee schemes covered repayment up to the maximum limit for the national deposit guarantees and the Dutch and British states covered the rest.
The dispute centred on the demand by the British and Dutch states that the Icelandic state should repay the Icelandic minimum deposit guarantees, equal to £2.35 bn repaid to the UK and €1.3 bn repaid to the Netherlands. The Icelandic state refused to take on this liability on behalf of the guarantee fund. Originally this was because the state lost funding access at credit markets due to the 2008–2011 Icelandic financial crisis, but later proposed bilateral loan guarantees for repayment were rejected by Icelandic voters in two separate referendums. The Icesave disputes and associated referendums sparked a nationalist backlash in Iceland, which some scholars have attributed as a factor in reducing support in Iceland for EU accession.
The Icesave bill 1 was the first negotiated loan agreement, attempting to define the repayment terms for these two loans. It was enacted on 2 September 2009 but was not accepted by the governments of the UK and Netherlands, due to a unilaterally attached term added by the Icelandic parliament which limited Iceland's repayment guarantee only to 2024, with automatic cancellation of any potential owing still existing beyond this year. Instead, UK and Netherlands then counter proposed a new version of the loan agreement, referred to as Icesave bill 2, where no time limit was included for the Icelandic state's repayment guarantee. This was at first accepted by the Icelandic parliament, but the Icelandic president refused to enact the law and referred approval to a referendum being held on 6 March 2010, where voters subsequently rejected the law.
After the rejection of Icesave bill 2, renewed negotiations started on the terms for the repayment agreement. The negotiations resulted, in December 2010, in an adjusted agreement named Icesave bill 3, with better terms for Iceland. This included the removal of a previous creditor priority issue, a lower 3% interest rate, an interest moratorium until 1 October 2009, and a possible extension of the "repayment window" up to 30 years. When the Icesave bill 3 was put to a referendum in April 2011, it was again rejected, by 59% of Icelandic voters. After analysing the election result, stakeholders decided not to attempt negotiation of a further improved Icesave bill 4, but instead to refer the case to the EFTA Court as a legal dispute.
On 28 January 2013, the EFTA Court cleared Iceland of all charges, meaning that Iceland was freed from the disputed obligation for deposit guarantees worth €4.0 bn plus accrued interest to UK and the Netherlands. This caused shock, as some legal experts had suggested the EFTA Surveillance Authority would win. The repayment claim still existed as a claim on the Landsbanki receivership, who one year earlier had been ordered by the Supreme Court of Iceland to repay confiscated deposits as priority claims, totaling ISK 852 bn to the UK Financial Services Compensation Scheme and ISK 282 bn to De Nederlandsche Bank. By January 2016, the Landsbanki receivership had, through liquidation of assets, repaid all the priority claims.

Icesave

Icesave was an online savings account brand owned and operated by the private Landsbanki bank from 2006 to 2008 that offered savings accounts. It operated in two countries the United Kingdom and the Netherlands. The bank intended to roll the brand out to additional territories in 2008 and 2009.
In the UK, Icesave's marketing slogan was "clear difference", and it offered three types of savings accounts: an immediate-access savings account, cash ISA, and a range of fixed-rate bonds. Interest rates on these accounts were over 6 per cent, among the best rates offered by online banks to UK customers at the time. At the time of Landsbanki's collapse, the bank had over 300,000 Icesave customers in the UK, with deposits of over £4 billion.
In the Netherlands, Icesave's marketing slogan was . It offered a single type of account: an immediate-access savings account which initially offered 5 per cent interest, later increased to 5.25 per cent. In the five months that it operated in the Netherlands, Icesave attracted more than 125,000 customers who deposited €1.7 billion.
Icesave accounts were accounts with Landsbanki's branches in London and Amsterdam, as the logo used in the United Kingdom made clear: "Icesave, part of Landsbanki, Reykjavik, Iceland". As Icesave was marketed as part of Landsbanki, the later complaints of the United Kingdom and Netherlands related to different treatment of Icelandic Landsbanki accounts and Icesave accounts.

Kaupthing Edge

was an online savings brand owned and operated by Kaupthing Bank and its subsidiaries from 2007 to 2008. It offered savings accounts only to personal savers and operated in ten countries. One major difference between Kaupthing Edge and Icesave was that Kaupthing Edge accounts were usually held not with branches but with subsidiaries. This means responsibility for regulation of the subsidiaries and provision of deposit guarantees rested with the host countries.
In four cases Kaupthing Edge accounts were held in branches:
  • Finland, from October 2007.
  • Norway, from January 2008.
  • Germany, from March 2008, attracting about 30,000 depositors.
  • Austria, from 4 September 2008, attracting 200–300 customers with about €3 million in deposits.
In Finland and Norway, the local financial supervisors took over Kaupthing's operations and guaranteed deposits. In Austria, a private agreement was reached between the Austrian authorities and Kaupthing's receivers, with accounts being transferred to other banks. In Germany there were serious problems with deposit insurance identical to those suffered by Icesave depositors in the UK and the Netherlands. In this case, German authorities quickly seized all assets and deposits in Germany before the Icelandic managers were able to move them, thus preventing them from being transferred to Iceland or other offshore accounts.
German depositors started to get their capital back on 22 June 2009, but lost accrued interest.

Collapse of Landsbanki

There had been concern about possible weakness of the Icelandic banking system throughout 2008, especially following the decline in value of the ISK, Icelandic króna,. Iceland's three major banks: Kaupthing, Landsbanki and Glitnir were all highly leveraged by international standards, and their combined foreign debt was more than five times Iceland's gross domestic product. During the 2008 financial crisis, this debt became increasingly difficult to refinance, especially after the collapse in mid-September of U.S. financial-services firm Lehman Brothers. Matters came to a head during the weekend of 4–5 October, with numerous comments in the British press and on discussion forums questioning the solvency of Icelandic banks. This prompted a run on deposits in the UK.
On 6 October, the Icelandic government pushed an emergency law through Iceland's parliament, the Althing, in response to the "unusual financial market circumstances". In a separate measure, the government also guaranteed "that deposits in domestic commercial and savings banks and their branches in Iceland will be fully covered." That evening, the Guernsey subsidiary of Landsbanki went into voluntary administration with the approval of the Guernsey Financial Services Commission. The administrators later said that "The main reason for the Bank’s difficulties has been the placing of funds with its UK fellow subsidiary, Heritable Bank." Guernsey's Chief Minister stated "the directors of Landsbanki Guernsey took appropriate steps by putting the bank into administration."
The FME placed Landsbanki in receivership early on 7 October. A press release from the FME stated that all of Landsbanki's Icelandic branches, call centres, ATMs and internet operations will be open for business as usual, and that all "domestic deposits" were fully guaranteed. The Icesave UK website announced: "We are not currently processing any deposits or any withdrawal requests through our Icesave internet accounts. We apologise for any inconvenience this may cause our customers. We hope to provide you with more information shortly."
That evening, one of the governors of the Central Bank of Iceland, former Prime Minister Davíð Oddsson, was interviewed on Icelandic public service broadcaster RÚV and stated that "we do not intend to pay the debts of the banks that have been a little heedless". He compared the government's measures to the U.S. intervention at Washington Mutual, and suggested that foreign creditors would "unfortunately only get 5–10–15% of their claims". A long-standing opponent of Icelandic membership of the European Union and adoption of the euro as national currency, he also claimed that "f we were tied to the euro, we would just have to succumb to the laws of Germany and France."
Two days later, on 9 October, the Icelandic assets and liabilities of Landsbanki were transferred to a new government-owned bank, Nýi Landsbanki. As Landsbanki had been acquiring assets in Iceland with foreign loans and deposits, the assets of Nýi Landsbanki exceeded its liabilities by ISK 558.1 billion, even after Nýi Landsbanki had made provisions for over half its loans to customers. Icesave deposits, along with all foreign borrowings, remained in the old Landsbanki, which was left with ISK 1743 billion in assets to face up to ISK 3197 billion of liabilities.