The government has promised to protect 100% of British savers' money in Icesave following the Icelandic-owned bank putting a block on all cash withdrawals.
Yesterday, Icesave froze its savings account business in the UK following its Icelandic owner being taken into public ownership. In a statement on its website, the bank said: "We are not currently processing any deposits or any withdrawal requests through our Icesave internet accounts. We apologise for any inconvenience this may cause our customers. We hope to provide you with more information soon."
The Icelandic regulator has nationalised Icesave's owner Landsbanki. The Icelandic Financial Supervisory Authority said it made the move in order to "ensure continued commercial bank operations in Iceland", adding that it was business as usual.
It is likely that Icesave put the block in place to stop a run on the bank and in response to high levels of customer withdrawals. Landsbanki launched Icesave into the UK in 2006. It is estimated to have around £5 billion in saver deposits.
Prior to Landsbanki being taken into public ownership, the Icelandic government suspended share trading in its financial sector as investors reacted badly to the news that banks would be forced to cut back on their overseas operations. It then promised savers 100% protection for their money.
However, the Icelandic guarantee does not cover UK customers of Icesave or Kaupthing Edge. The government put the protection in place amid fears that Icelandic banks are in serious danger of flopping.
The bank's terms and conditions state that "in very exceptional circumstances only" it reserves the right to to stop transactions in and out of its accounts for up to 60 days.
From 7 October all deposits held in the UK are protected up to £50,000. Icesave is covered by two compensation schemes: the Financial Services Compensation Scheme (FSCS) in the UK and the Icelandic scheme. Prior to the government's reassurance, savers would have had to receive compensation (up to £50,000) from both schemes, with the onus on them to apply to both.
Over the weekend, Geir Haarde, Iceland's prime minister, told Iceland's banks that they had grown too big and needed to sell off some of their overseas operations and bring the capital back home.
Haarde's announcement sparked panic among investors and “disrupted” normal share pricing.
Iceland’s largest bank, Kaupthing Bank, has been in the UK since 2005 but only launched a savings account in 2008 through its Edge brand. Its deposits have now been transfered to ING Bank, and the government is offering savers 100% protection.