Icesave Dispute - Collapse of Landsbanki

Collapse of Landsbanki

See also: 2008–2012 Icelandic financial crisis

There had been concern about the possible weakness of the Icelandic banking system throughout 2008, especially following the decline in value of the Icelandic króna (35 per cent from January to September 2008). 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 (GDP). With the global financial crisis of 2008, this debt was becoming 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 (and possibly in other markets).

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 would later say 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 (domestic deposits and government equity capital) by 558.1 billion krónur (€3.87bn, £3.06bn), 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 1743 billion krónur (€12.1bn, £9.56bn) in assets to face up to 3197 billion krónur of liabilities (€22.2bn, £17.5bn).