“Existing single market rules can create unacceptable risks to depositors or to taxpayers”.
Lessons of Landsbanki
In his memoir former
Chancellor, Alistair Darling describes Landsbanki in 2008 as “a disaster
waiting to happen. ...all the action was in London but the regulation and
detailed supervision of what was going on was supposed to be carried out over a
thousand miles away in Iceland.”[1]
The FSA had alerted the Chancellor of their concerns about Landsbanki and
Haupthing, another Icelandic bank operating in London. At their prompting he
held meetings with an Icelandic government delegation and later spoke directly
to the country’s Prime Minister. The passporting arrangement meant that the UK
authorities could do little more than put pressure on Iceland over Landsbanki. [2]
Landsbanki failed in
October 2008 by which time its online Icesave accounts held £4.6 billion in UK
deposits from 230,000 British customers.
In theory Icesave
customers were protected by a deposit guarantee scheme. Iceland guaranteed only
the first €21,000 (about £17,000) of each depositor’s funds and Landsbanki had
voluntarily joined the UK’s deposit insurance scheme which topped this sum up
to £50,000.Unfortunately the government of Iceland was unable to honour this
guarantee.
The UK government
intervened. Firstly the bank’s UK assets were seized using powers originally
intended to deal with money laundering by terrorist organisations. To avoid
further loss of confidence in the banking system the Chancellor of the
Exchequer insisted that depositors should be repaid in full.
The funds paid in
compensation to Icesave customers by the British government were treated as a
loan which Iceland needed to repay. The UK launched prolonged legal and
diplomatic challenges to recover the money. The final instalment was eventually
handed over in January 2016.[3]
Iceland had a population
of 318,500 in 2009 and GDP of €2.2 billion[4]
yet Iceland’s taxpayers were expected to pay compensation to UK savers
amounting to £4.6 billion. To make matters worse the Krona was steeply devalued
by Iceland’s crisis.
The full text of my submission is available here.
[1]
Alistair Darling, Back from the Brink:
1000 days at number 11, Atlantic Books, 2011. p147
[2]
See also The Turner Review: A regulatory response to the global banking crisis,
FSA, 2009.p38
[3] Financial Times, 15 January, 2016.
https://www.ft.com/content/3ec13e4c-bbaa-11e5-b151-8e15c9a029fb
[4] Eurostat
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