the icesave dispute: priorities and division of claims

The Icesave agreementsThe disputed division of claims explained

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Imagine three Icesave retail deposit accounts in the UK: A, B and C holding 10 000, 30 000 and 80 000 GBP respectively.

£10 000

£30 000

£80 000

A B C

Total deposits £120 000

Each of the deposits is guaranteed by the Icelandic Depositors' and Investors' Guarantee Fund (DIGF) up to EUR 20 887 as stated in the corresponding EU directive.

In October 2008, EUR 20 887 was the equivalent of GBP 16 500.

A B C

Minimum guarantee:€20 887 or £16 500


On October 7, 2008 British authorities unilaterally decide that the Financial Services Compensation Scheme (FSCS) shall provide an additional guarantee up to GBP 50 000 of each account’s deposits in case of a failure of a bank in the UK.

A B C

Additional guarantee:Up to £50 000



On October 8, 2008 Landsbanki (Icesave’s operating bank) fails and depositors worry for their deposits.

A B C



!

!

!Uncertain deposits £120 000

The FSCS steps in and pays depositors a guarantee up to GBP 50 000 as promised.

A B C

☺

☺

☹Compensated by UK £90 000

£30 000

£120 000TotalAdditional guarantee:Up to £50 000


Uncertain deposits

Additionally, British authorities - unilaterally again - decide to pay Icesave depositors their entire deposits, also those exceeding the previously stated GBP 50 000 limit. Retail depositors have at this point been fully compensated by the UK authorities.

A B C

☺

☺

☺Compensated by UK £120 000



As the assets of the Icelandic Depositors' and Investors' Guarantee Fund do not cover the minimum guarantee, Iceland signs a state guarantee, covering the minimum amount of up to GBP 16 500 per account.The UK will provide Iceland with a corresponding loan.

A B C

Guaranteed by Iceland

Compensated by UK

£43 000

£77 000



Any recovered Landsbanki assets will then meet these liabilities.

A B C

? Landsbanki assets

£43 000

£77 000

???




Compensated by UK

If each deposit account is seen as a single claim, Landsbanki assets will proportionally meet each account’s deposit “from the bottom up”.The Icelandic state guarantee will then cover the missing amount up to the GBP 16 500 mark.

A B C

? ???Landsbanki assets

< £43 000

< £77 000




Compensated by UK

Suppose that Landsbanki assets end up covering 50% of total deposits. The overall deposit coverage would be as shown above.

A B C

£6 500

£60 000

£53 500

Landsbanki assets




Compensated by UK

Instead, according to the current loan agreement, the differently-covered parts of each deposit, (i.e. the part below GBP 16 500, the part between GBP 16 500 and 50 000, and the part above GBP 50 000) are seen as a separate claims and each receives the same proportion of recovered assets.

A B C

? ???Landsbanki assets

< £43 000

< £77 000




Compensated by UK

Suppose again that Landsbanki assets end up meeting 50% of total deposits. This time the overall deposit coverage would be as shown here.

A B C

£21 500

£60 000

£38 500

Landsbanki assets




Compensated by UK

Let’s examine these two methods side-by-side and also observe what happens when we assume a different

recovery percentage for Landsbanki assets

Recovered assets meet 50% of deposits


Landsbanki assets

Compensated by UK

£6 500

£60 000

£53 500

A B C


Landsbanki assets

Compensated by UK

£21 500

£60 000

£38 500

A B C

Current agreementUndivided claims




£32 250

£30 000

£57 750

A B C

£16 500

£30 000

£73 500

A B C


Landsbanki assets

Compensated by UK


Landsbanki assets

Compensated by UK





£10 750

£90 000

£19 250

A B C

£2 500

£90 000

£27 500

A B C


Landsbanki assets

Compensated by UK


Landsbanki assets

Compensated by UK




In the previous examples, Iceland pays up to four times as much under the current agreement as it does if the claims are left undivided.

Which of these legal interpretations is correct is disputed.

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the icesave dispute: priorities and division of claims

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