Iceland violated European Union law by failing to take measures to ensure U.K. and Dutch depositors were compensated for their losses from the collapse of Landsbanki Islands hf, regulators told a court today.
Iceland has a duty under EU law to guarantee a minimum compensation within a time limit and how this is achieved is up to the government, the European Free Trade Association’s court was told today. Neither a “force majeure,” nor financial considerations could justify Iceland’s failure to ensure adequate compensation, the EFTA Surveillance Authority told the Luxembourg-based court.
“Iceland seemed to have discharged its duty to supervise the deposit guarantee scheme by actually doing nothing at all,” said Xavier Lewis, lawyer for the authority. The purpose of EU law “is to prevent a run on banks. The consequence of Iceland’s argument is the greater the risk of a run on banks, the lesser the protection provided.”
The U.K. and the Netherlands ended up compensating their citizens and are now demanding that Iceland repay the full amount, with interest. The surveillance authority, the agency in charge of supervising Iceland’s compliance with European rules, sued the island in December over its failings.
While domestic Icesave depositors were fully protected and never lost access to their money, U.K. and Dutch depositors were “left with nothing at all,” said Lewis. “Distinction based on place of deposits amounts to discrimination.”
Iceland rejected the authority’s arguments that it violated EU law by not honoring $5.4 billion in depositor guarantees on accounts held by British and Dutch savers.
The authority’s stance meant that “if all else fails, the state must step in,” said Tim Ward, a lawyer representing Iceland.
“If the state were required to pay compensation where all else fails, the exposure would be vast,” Ward told a three-judge panel. “The states would plainly have to make very large provisions for this exposure.”
Ward said EU law obliged Iceland to set up and supervise a deposit guarantee program “but not” to pay.
Landsbanki, which had sought to attract foreign depositors through high-yielding internet accounts that saved it the trouble of opening subsidiaries abroad, collapsed in October 2008 with the rest of Iceland’s debt-laden banking industry.
The caretakers of the Landsbanki estate began repaying priority claims to British and Dutch authorities last year and said in May they had covered 43 percent of all such obligations. The bank’s winding-up committee said last year assets will cover the full $11 billion that depositors risked losing when the bank collapsed, more than double the guarantee.
Iceland is obliged under European rules to guarantee minimum compensation of 20,000 euros ($26,120) to Dutch and British holders of Landsbanki’s high-yielding Icesave accounts, according to the authority.
The agency checks that Iceland, Norway and Liechtenstein comply with European rules governing the European Economic Area, which consists of the three countries plus the 27-nation EU.
About 350,000 U.K. and Dutch depositors risked losing their savings when Landsbanki collapsed together with the rest of Iceland’s debt-laden financial industry in October 2008. At their peak, Landsbanki, Kaupthing Bank hf and Glitnir Bank hf had combined debts that swelled to 10 times Iceland’s $12 billion economy.
The $85 billion default of the lenders plunged Iceland into its worst recession in six decades. The government escaped a sovereign bankruptcy by refusing to back the banks and has since started repaying the International Monetary Fund and its Nordic neighbors for rescue loans it took on after the 2008 collapse.
The European Commission, the EU’s executive agency, is supporting the EFTA authority in the case. The governments of Norway and Liechtenstein are backing Iceland.
Lewis said the court should send a message to all depositors in the EEA, that “whatever happens next, your deposits are guaranteed and safe.”
The case is: E-16/11, EFTA Surveillance Authority v. Iceland.