Iceland joined the European Economic Area (EEA) in 1994 and enjoyed the free movement of persons, services and capital granted by the EU. Iceland’s Kaupthing Bank, among others, took advantage of this. The bank is headquartered in the Icelandic capital Reykjavik and employed about 3,200 people at the beginning of 2008. The bank offered savers extremely favorable interest rates on overnight deposits at its branches in the EU. However, Kaupthing Bank did not participate in the deposit insurance institutions of the respective EU host country; this saved costs and was not mandatory under EU law. – In the fall of 2009, the Icelandic supervisory authority declared Kaupthing Bank insolvent. Thousands of investors in the EU lost their money. The German government succeeded in obtaining compensation for the approximately 50,000 customers of Kaupthing Bank. The bank was nationalized and has been operating under the name Arion Bank since November 2009. – The events surrounding Kaupthing Bank exposed weaknesses in EU law: Banks from the EEA were allowed to operate in the EU without being subject to the strict prudential regulations of banks operating there. – See foreign bank deposits, deposit insurance, guarantee fund, fire fund, cross-guarantee system, International Association of Deposit Insurers, feedback mechanism, collateral obligation, sovereign default, too big to save principle. – Cf. Deutsche Bundesbank Monthly Report of July 2010, p. 55 (Iceland must move to foreign exchange management), BaFin Annual Report 2009, p. 151 (serving German customers of Kaupthing Bank).
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University Professor Dr. Gerhard Merk, Dipl.rer.pol., Dipl.rer.oec.
Professor Dr. Eckehard Krah, Dipl.rer.pol.
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