Case study Landsbanki and Icesave

Although Iceland is not part of the European Union, it is part of the European Single Market and participates in the European Economic Area. Iceland was the first country affected by the global financial crisis and its systemic failure ranked third in the greatest bankruptcies in the world.

The respondents to the questionnaire for this study agreed when they stated that the collapse of the online savings bank Icesave was an alarm call and they further believe that the tenet, ‘savings accounts represent no risk’ is an anachronism. Landsbanki, a systemically important financial institution in Iceland, launched a brand called Icesave to acquire capital used by Landsbanki to fund highly leveraged debt. The savings accounts offered above market returns and were so successful that a highly leveraged mismatch between deposits in banks and the reserves at the central bank resulted.

Icesave had many customers in the United Kingdom and The Netherlands. After the failure of the bank, the deposit guarantee scheme had to cover the deposits. Iceland could not guarantee the deposit insurance payments and the Netherlands and United Kingdom covered the repayment of insured deposits to its citizens and tried to recover their advances with the Icelandic state. The governments of The Netherlands, United Kingdom and Iceland agreed on repayment of the advances but after a referendum was held, the Icelandic population rejected the bills. The case was submitted to the EFTA court which handles disputes relating to the European Economic Area and the infringement of the EEA laws. The ruling of the EFTA court (2013) was in favour of Iceland and the claims from The Netherlands and United Kingdom were forwarded to the Landsbanki receivership.