The Icesave agreements
The disputed division of claims explained
Made by

£80 000
Total deposits £120 000
£30 000
£10 000
A B C
Imagine three Icesave retail deposit accounts in the UK: A, B and C
holding 10 000, 30 000 and 80 000 GBP respectively.

Total deposits £120 000
Minimum guarantee:
€20 887 or £16 500
A B C
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.

Total deposits £120 000
Additional guarantee:
Up to £50 000
Minimum guarantee:
€20 887 or £16 500
A B C
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.

!
Uncertain deposits £120 000
Additional guarantee:
Up to £50 000
!
Minimum guarantee:
€20 887 or £16 500
!
A B C
On October 8, 2008 Landsbanki (Icesave’s operating bank) fails and
depositors worry for their deposits.

☹
Uncertain deposits £30 000
Compensated by UK £90 000
Total £120 000
Additional guarantee:
Up to £50 000
☺
Minimum guarantee:
€20 887 or £16 500
☺
A B C
The FSCS steps in and pays depositors a guarantee up to
GBP 50 000 as promised.

☺
Compensated by UK £120 000
Additional guarantee:
Up to £50 000
☺
Minimum guarantee:
€20 887 or £16 500
☺
A B C
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.

Compensated by UK £77 000
Guaranteed by Iceland £43 000
Total £120 000
Additional guarantee:
Up to £50 000
Minimum guarantee:
€20 887 or £16 500
A B C
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.

Compensated by UK £77 000
Guaranteed by Iceland £43 000
? Landsbanki assets ???
Additional guarantee:
Total £120 000 Up to £50 000
Minimum guarantee:
€20 887 or £16 500
A B C
Any recovered Landsbanki assets will then meet these liabilities.

Compensated by UK < £77 000
Guaranteed by Iceland < £43 000
? Landsbanki assets ???
Additional guarantee:
Total £120 000 Up to £50 000
Minimum guarantee:
€20 887 or £16 500
A B C
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.

Compensated by UK < £77 000
Guaranteed by Iceland < £43 000
? Landsbanki assets ???
Additional guarantee:
Total £120 000 Up to £50 000
Minimum guarantee:
€20 887 or £16 500
A B C
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.

Compensated by UK £53 500
Guaranteed by Iceland £6 500
Landsbanki assets £60 000
Additional guarantee:
Total £120 000 Up to £50 000
Minimum guarantee:
€20 887 or £16 500
A B C
Suppose that Landsbanki assets end up covering 50% of total
deposits. The overall deposit coverage would be as shown above.

Compensated by UK < £77 000
Guaranteed by Iceland < £43 000
? Landsbanki assets ???
Additional guarantee:
Total £120 000 Up to £50 000
Minimum guarantee:
€20 887 or £16 500
A B C
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.

Compensated by UK < £77 000
Guaranteed by Iceland < £43 000
? Landsbanki assets ???
Additional guarantee:
Total £120 000 Up to £50 000
Minimum guarantee:
€20 887 or £16 500
A B C
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.

Compensated by UK £38 500
Guaranteed by Iceland £21 500
Landsbanki assets £60 000
Additional guarantee:
Total £120 000 Up to £50 000
Minimum guarantee:
€20 887 or £16 500
A B C
Suppose again that Landsbanki assets end up meeting 50% of total
deposits. This time the overall deposit coverage would be as shown
here.

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

Undivided claims Current agreement
Compensated by UK £53 500 Compensated by UK £38 500
Guaranteed by Iceland £6 500 Guaranteed by Iceland £21 500
Landsbanki assets £60 000 Landsbanki assets £60 000
Additional guarantee:
Up to £50 000
Minimum guarantee:
€20 887 or £16 500
A B C A B C
Recovered assets meet 50% of deposits

Undivided claims Current agreement
Compensated by UK £73 500 Compensated by UK £57 750
Guaranteed by Iceland £16 500 Guaranteed by Iceland £32 250
Landsbanki assets £30 000 Landsbanki assets £30 000
Additional guarantee:
Up to £50 000
Minimum guarantee:
€20 887 or £16 500
A B C A B C
Recovered assets meet 25% of deposits

Undivided claims Current agreement
Compensated by UK £27 500 Compensated by UK £19 250
Guaranteed by Iceland £2 500 Guaranteed by Iceland £10 750
Landsbanki assets £90 000 Landsbanki assets £90 000
Additional guarantee:
Up to £50 000
Minimum guarantee:
€20 887 or £16 500
A B C A B C
Recovered assets meet 75% of deposits

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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