The Icesave Bank of Iceland; from Rock-solid to Volcano Hot: Is the EU Deposit Guarantee Scheme Resisting Financial Meltdown?

The Icelandic internet bank Icesave went bankrupt in late 2008. The insufficient Icelandic deposit guarantee scheme (Tryggingasjóður) did not resist the Icelandic financial meltdown and failed to compensate British and Dutch depositors the guaranteed sum of €20,887 as settled in Directive 94/19/EC, which according to the European Economic Area Agreement (EEA) regulates the Icelandic financial sector. The British and Dutch deposit schemes paid out guarantees to their national Icesave depositors on behalf of the Icelandic scheme. Subsequently, an agreement was reached between Iceland, the United Kingdom and the Netherlands. As part of the arrangement, the Icelandic government guaranteed the reimbursement of the British and Dutch bridging loan. The Icelandic referendum of 6 February 2010 rejected the agreement and the Icesave Act, which torpedoed the Icesave reimbursement plan. The EFTA Surveillance Authority (ESA) issued a formal reprimand to Iceland. However, this has not been followed by any infringement proceedings as provided for by the EEA agreement.

The author's position is that the ESA position results from a confusion of regulatory commitments with pecuniary liabilities. The key point is whether the Icelandic guarantee is in accordance with EU Directive 94/19/EC. The Directive requires the legislator to act. It is not a directive to force the government to pay (see Directive 94/19/EC Article 3.1.). This provision contributes to the implementation of the ban on Member States against guarantee schemes that distort competition. The schemes are self-financing and fully paid by the financial institutions. In the case of insufficient coverage, all depositors are subject to an equal pro rata reduction in compensation, as the scheme guarantee of full payment of the deposit guarantee sum of €20,887 is an objective to be reached within a reasonable time and not a legal right from day one. Government aid to top up the fund is prohibited, whether it is the intention or consequence. The Icelandic government cannot cover the scheme’s insufficiency by granting money to the fund. As the EU enjoys exclusive autonomy over its external relations, Member States cannot bilaterally arrange for such a solution. Thus, depositors not fully reimbursed are stuck with Icelandic bankruptcy proceedings. Claims are considered by the administrators in accordance with the Icelandic Bankruptcy Act on outstanding debts not paid out by the deposit guarantee scheme.