Iceland’s financial sector has experienced significant transformations, particularly in the wake of the 2008 financial crisis. Banks operating in the country face risk factors such as volatile global markets, economic downturns, and stringent regulatory environments. To ensure the security of retail depositors and small businesses, the Deposit Guarantee Scheme of Iceland (DGS) has been established as a safeguard against bank failures.

Bank deposit insurance is a mechanism designed to protect the deposits of retail depositors and small businesses in the event of a bank failure. By guaranteeing the reimbursement of deposits up to a specified limit, deposit insurance maintains confidence in the banking system and prevents bank runs. This financial stability is essential for promoting economic growth and fostering financial inclusion.

The Depositors’ and Investors’ Guarantee Fund (DIGF) is the institution responsible for administering the Deposit Guarantee Scheme in Iceland. Based in Reykjavik, the DIGF is an independent legal entity governed by the Icelandic Act on the Depositors’ and Investors’ Guarantee Fund. Its mandate, as outlined by the Act, is to provide deposit insurance coverage to protect depositors and contribute to the stability of the financial system in Iceland.

The Deposit Guarantee Scheme of Iceland is triggered when a bank is deemed unable to meet its obligations to depositors, as determined by the Icelandic Financial Supervisory Authority (FME) or a court. The definitions of this trigger include insolvency, a moratorium on payments, or the revocation of the bank’s operating license.

The claim filing procedure commences with the DIGF notifying eligible depositors about the bank failure and providing information on the reimbursement process. Depositors are not required to file claims individually, as the DIGF automatically initiates the reimbursement process. Eligible depositors include individuals, small businesses, and non-profit organizations, while financial institutions, public authorities, and larger companies are generally ineligible for DGS coverage.

The maximum insured amount under the Deposit Guarantee Scheme of Iceland is EUR 100,000 per depositor per bank. Temporarily high account balances may also be covered in specific situations, such as real estate transactions, inheritance, or insurance payouts, for up to six months from the date the funds were deposited.

If a claim is ineligible for deposit insurance coverage or gets rejected, depositors may seek legal remedies by filing a lawsuit against the failed bank or appealing to the relevant authorities.

Over the past two decades, Iceland has witnessed significant bank failures, most notably during the 2008 financial crisis when its three largest banks – Kaupthing, Glitnir, and Landsbanki – collapsed. These incidents emphasize the importance of understanding the financial health of banks and the protections offered by the Deposit Guarantee Scheme of Iceland.

While the DGS serves as a safety net for depositors, other avenues exist to recover money in case of bank failures. Under Icelandic law, depositors may file claims as creditors during the bank’s resolution or liquidation process. The resolution process is overseen by the FME, while the liquidation process is managed by a court-appointed liquidator.