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Document Type

Case Studies

Abstract

At year-end 2005, almost all of the total assets of Iceland’s banking system were concentrated in just three banks (Glitnir, Kaupthing, and Landsbanki). These banks were criticized by certain financial analysts in early 2006 for being overly dependent on wholesale funding, much of it short-term, that could easily disappear if creditors’ confidence in these banks faltered for any reason. Landsbanki, followed later by Kaupthing and then Glitnir, responded to this criticism and replaced part of their wholesale funding by using online accounts to gather deposits from individuals across Europe. In Landsbanki’s case, these new deposits were marketed under the name “Icesave” and legally held in branch offices in the United Kingdom and the Netherlands. When Landsbanki failed in October 2008, the obligation to repay depositors fell upon Iceland’s deposit insurance fund, not upon the British and Dutch deposit insurance funds. However, the Icelandic fund did not have nearly enough money to repay all eligible depositors in the three major Icelandic banks, all of which had failed, so the Icelandic government made the controversial decision to repay only domestic depositors.

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