The Icelandic banking system has faced some turbulence in recent years, and as a foreign account holder, you may be concerned about the potential impact of bank liquidation in Iceland.

General Overview: Bank Liquidation in Iceland Bank liquidation refers to the process of dismantling a financial institution’s assets and liabilities, typically due to insolvency, mismanagement, or other regulatory breaches. The process is closely regulated and monitored by the Icelandic Financial Supervisory Authority (FME) and the Central Bank of Iceland. Foreign account holders, like you, may be affected by such events, which is why it’s crucial to be informed about the procedures and mechanisms in place.

The Rationale for Bank Liquidation in Iceland Iceland has faced numerous challenges in its banking sector, with the 2008 financial crisis being the most notable example. The collapse of Iceland’s three largest banks led to a restructuring of the banking system and tighter regulations. The rationale behind bank liquidation includes:

Ensuring financial stability: The FME aims to maintain the stability and integrity of the Icelandic financial system. Liquidating non-viable banks helps to minimize the risk of contagion and prevent further destabilization.

Protecting depositors and creditors: Liquidation procedures are designed to ensure that depositors and creditors are treated fairly and that their claims are addressed in an orderly manner.

Upholding regulatory compliance: Banks that fail to meet regulatory standards may face liquidation as a consequence of non-compliance, ensuring that the financial system remains robust and well-regulated.

Icelandic Banking Laws

The Act on Financial Undertakings (No. 161/2002): This Act provides the framework for the establishment, operation, and supervision of financial institutions in Iceland. It outlines the FME’s responsibilities and powers, including the authority to revoke a bank’s operating license and initiate liquidation proceedings.

The Act on Deposit Guarantees and an Investor Compensation Scheme (No. 98/1999): This Act establishes the Icelandic Depositors’ and Investors’ Guarantee Fund (DIGF), which guarantees the repayment of deposits and securities held by Icelandic banks up to certain limits.

EU Directive 2014/59/EU (Bank Recovery and Resolution Directive): As a member of the European Economic Area (EEA), Iceland is subject to EU directives, including the Bank Recovery and Resolution Directive (BRRD). The BRRD sets out the rules and procedures for resolving failing banks, including the use of bail-in mechanisms and the establishment of resolution funds.

Repayment Procedures and Creditor Safeguards

Deposit guarantees: The DIGF guarantees deposits held at Icelandic banks up to a limit of ISK 1,700,000 (approximately €11,000) per depositor, per bank. This guarantee applies to both Icelandic and foreign account holders.

Priority ranking of claims: When a bank is liquidated, the Act on Financial Undertakings prescribes a specific order in which claims are to be paid. Secured claims and deposits covered by the DIGF are given priority, followed by unsecured claims, subordinated claims, and finally, shareholders’ equity.

Timelines for repayment: The DIGF aims to pay depositors within 20 working days of a bank’s failure, although this period can be extended in exceptional circumstances. For claims not covered by the DIGF, the liquidator will be responsible for distributing the proceeds from the bank’s assets according to the priority ranking of claims, which may take longer.

Creditor representation: Creditors have the right to be represented during the liquidation process, either individually or collectively. The Winding-up Board, appointed by the FME, is responsible for representing the interests of all creditors and ensuring that the liquidation process is transparent and fair.

Right to appeal: Creditors who are dissatisfied with the decisions made during the liquidation process have the right to appeal to the Icelandic courts, providing an additional layer of protection and ensuring that your interests are properly safeguarded.