UK Banks pay £1 billion to compensate Icelandic savers
On 1st September the UK’s banks will make the first of three multimillion pound payments to cover the costs of the Icelandic banking crisis.
When the banking crisis hit Iceland, hundreds of thousands of British customers had deposits in Icelandic banks and there was concern that they might lose their savings. At the time the UK Government stepped in to ensure that no-one lost their money.
The UK’s banks are now writing out cheques for up to £1.089 billion of compensation already paid to UK customers for savings held in the failed Icelandic banks.
The payments will be made in three instalments, the first of which will be happen on 1st September. These payments fulfil the industry’s obligations to the Financial Services Compensation Scheme (FSCS) which protects customer deposits in the event of bank failure.
The fact that the industry is making these payments is further evidence to show that the UK’s banking industry continues to return to strength. It also demonstrates that the FSCS system works, is robust and will protect savers in the event of another bank collapse. The FSCS has now been extended so that all customers’ savings, up to the value of £85,000, would be protected if another bank goes into insolvency.
Commenting, BBA Chief Executive Anthony Browne said:
“The UK’s banks are paying £1 billion to compensate for UK savers who could have lost everything when the Icelandic banking crisis hit. This compensation ensured that no savers who had money in Icelandic banks lost out.
“These payments show that the system works, and we hope it gives confidence to consumers that if there is ever another bank failure that their savings will be protected.”
The aggregated expected compensation to be paid by banks, building societies and credit unions totals £1.089 billion to be paid over the next 3 years. The payments will comprise 3 tranches of £363m. The compensation figure being paid is based on the FSCS’s estimated shortfall in recoveries at Apr 2016. This is the date at which the FSCS will need to repay the principal on the loan that was made by HM Treasury to the FSCS to fund the compensation pay-outs that were made to depositors.
The compensation being paid by the banks will fund the “shortfall” that will be created as a result of the FSCS being unable to recover the full amount that is owed by the estates of the Icelandic banks. The FSCS expects the ultimate recoveries shortfall to equal approximately £500m which, given £1.089 billion will be funded by the banks under this compensation package the FSCS is expecting the Icelandic banks to make further payments after April 2016.
The breakdown of the current shortfall by bank is set out below:
|Bank||Current Shortfalls in funding|
|Heritable Bank Plc||£104,310,000|
|Kaupthing Singer & Friedlander||£601,831,000|
(Source: FSCS Annual Report 2012/2013)
For more information please contact the BBA press office on 0207 216 8989.
Notes to Editors
- When Icesave, went bust in the autumn of 2008 at the height of the international banking crisis, the UK government stepped in.
- To maintain public confidence and prevent a run on any other banks, the then UK Chancellor Alistair Darling decided to bail out 230,000 UK savers in Icesave to the full extent of their savings - about £3.5bn - not just to the minimum decreed by European rules for deposit compensation schemes.
- At the time, the Icelandic deposit guarantee scheme was responsible for the first 20,887 euros (£16,300) of compensation, with that being topped up to then ceiling of £50,000 per person by the (FSCS. HM Treasury also guaranteed 100% of all UK retail depositors in Icesave, in addition to the amount protected by the FSCS.
Heritable and Kaupthing Singer & Friedlander
- Heritable was a subsidiary of Landsbanki Islands hf. And Kaupthing Singer & Friedlander was a banking subsidiary of Kaupthing Bank. Both banks were declared in default by the FSA. The declarations of default triggered the protection of FSCS.
- The Treasury used its powers to transfer the majority of Heritable's retail deposit book and the Edge deposit book of Kaupthing to ING Direct. The retail deposits that were not transferred to ING Direct were paid out through the FSCS.
- For eligible retail depositors not transferred to ING Direct the FSCS repaid up to £50,000 compensation per person and HMT covered the balances of more than £50,000, so that eligible retail depositors who had savings of more than £50,000 were fully protected.
Financial Services Compensation Scheme
- The FSCS is the UK's statutory fund of last resort for customers of financial services firms. This means that FSCS can pay compensation to consumers if a financial services firm is unable, or likely to be unable, to pay claims against it. Funded by industry, the FSCS is an independent body, set up under the Financial Services & Markets Act 2000 (FSMA). Individual consumers are not charged for using the service.
- The FSCS deals with claims against authorised firms (those regulated by the Financial Conduct Authority or the Prudential Regulation Authority) that are unable, or likely to be unable, to pay claims against them. This will generally be because a firm has stopped trading and has insufficient assets to meet claims, or is in insolvency. This is described as being in default.