In 2008 Britain’s former prime minister Gordon Brown chose to invoke anti-terrorism laws to freeze the assets of a failed Icelandic bank…In January 28, 2013 a ruling delivered in Luxembourg by the European Free-Trade Association Court (pdf), dealt with the collapse of Icesave, an online subsidiary of Iceland’s Landsbanki. Before the crisis Icesave had used a European “passport” to open branches abroad and collected deposits in Britain and the Netherlands with almost no oversight from regulators in those countries. One condition of its passport was that it promised that its deposits were backed by a national deposit-insurance scheme in Iceland. Yet when the bank collapsed Iceland’s deposit scheme was overwhelmed. Icelandic depositors in the bank ended up getting their money back; the British and Dutch governments both had to step in to compensate depositors in their countries.
Many observers had expected the court to rule that Iceland was obliged to stand behind its national deposit-protection plan and not to discriminate against foreign depositors. Instead the court found that Iceland was obliged only to make sure that it had a deposit-insurance scheme. The state was not required to pay out if the scheme had no money because of a banking crisis. Oddly, the court also found that Iceland had not breached an obligation not to discriminate between domestic and foreign depositors, even though it made only the domestic ones whole.
The questions addressed by the court may seem anachronistic: European law on deposit protection has been extensively rewritten since the crisis. Yet the ruling is another warning to those who hope that regulators can strike binding agreements on how they will share the costs of a future banking crisis. Supervisors in America are already trying to ensure that foreign banks there operate as separately capitalised subsidiaries, so they do not have to rely on the vigilance of foreign regulators. Hopes that Europe’s banking union will include a mutual deposit-guarantee scheme are in any case faint. This week’s ruling will only weaken confidence in the willingness of countries to bail out foreign creditor
The Icesave ruling: In the cooler, Economist, Feb. 2, 2013, at 64