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The Icesave dispute: Priorities and division of claims

Hjalmar Gislason
Hjalmar Gislason
Hjalmar GislasonFounder & CEO at DataMarket

This presentation explains the disputed division of claims in relation to the agreement between Iceland and the UK to settle the Icesave deposit guarantees.

The Icesave dispute: Priorities and division of claims

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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.

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The Icesave dispute: Priorities and division of claims

  • 1. The Icesave agreements The disputed division of claims explained Made by
  • 2. £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.
  • 3. 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.
  • 4. 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.
  • 5. ! 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.
  • 6. ☹ 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.
  • 7. ☺ 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.
  • 8. 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.
  • 9. 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.
  • 10. 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.
  • 11. 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.
  • 12. 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.
  • 13. 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.
  • 14. 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.
  • 15. 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.
  • 16. Let’s examine these two methods side-by-side and also observe what happens when we assume a different recovery percentage for Landsbanki assets
  • 17. 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
  • 18. 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
  • 19. 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
  • 20. 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. Made by