A Summary Of The Icelandic Banking Debacle

A Summary Of The Icelandic Banking Debacle

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Since the collapse of the American investment banks Lehman Brothers at the start of September, the world economic crisis has leapt to the forefront of most peoples minds. Perhaps what was most worrying in the weeks following this event was the collapse of the Icelandic banking system, in which hundreds of thousands of British savers had invested money. As the dust settles, its now clear that savers will get their money back, but the past few months have been nervy times for many. The collapse of Icesave, in particular, was very painful for many depositors.

During 2007 and 2008, Icelandic banks opened UK subsidiaries offering attractively high rates to savers. Icesave, for instance, had an Internet savings account offering a high 6.5% AER, while UK subsidiary Kaupthing Edge was offering twelve month fixed rate bonds at a market leading 7% rate. The problem with these banks was that their growth was based on very risky investments. When the credit crunch hit hard, they were unable to get much-needed loans and credit to finance their books, and it didnt take long for the administrators to be called in.

Savers found soon found their accounts with Icesave frozen, and they were unable to withdraw their savings. Meanwhile, almost immediately after Icesaves parent company, Landsbanki, went into insolvency, Kaupthing also looked as if it would also go under, and it subsequently did. As a UK subsidiary, Kaupthing had its deposits fully covered by the UKs FSCS the government Financial Standards Compensation Scheme but Icesave was not fully guaranteed by this. Instead, depositors would have to claim the first 16,500 from the Icelandic protection scheme. It soon became apparent that the Icelandic government would be unwilling to pay.

However, the British government used powers from the Anti-terrorism, Crime and Security Act 2001to seize the banks assets, and fully guaranteed the deposits of the stricken Icesave customers. The deposits of Kaupthing Edge were quickly and quite seamlessly bought by Dutch bank ING, which is reassuring customers of its stable position. Fortunately, it seems that those UK customers seduced by the high interest rates of Icelandic banks have their savings guaranteed, but September certainly proved to be a very uncertain time and fraught with worry.

The period of Icelandic banks leading Internet comparison tables for savings accounts has now been consigned to the dustbin of history. Now the Icelandic invasion is over, were going to have to revert back to more familiar and indeed less risky high street banks. Alliance and Leicester is currently leading the way, with inflation busting savings accounts with a 6..6% rate of interest. Even the stricken Kaupthing Edge, the one time champion of comparison tables, couldnt compete with that.

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