Iceland has won a court case about deposit guarantees and since there is no appeal that settles the matter so far as this issue is concerned. Although the ruling is not binding on the European Court of Justice EFTA does follow similar directives and so it is possible they would come to the same conclusion should the situation arise
This seems to me to be a very satisfactory outcome, because any alternative would be daft: I see no reason at all for the public to pay when the banks go crazy/criminal.
As I see it a deposit guarantee scheme is a reasonable provision, but only when banks are properly regulated so that investment banks are separate from traditional banks, as was broadly the case in the past: the american Glass Steagel act is the most famous but similar provisions were in place elsewhere. To me, you cannot have a completely effective deposit guarantee without such a provision, nor in circumstances when banks make money out of nothing. The size of the debt which led to the crash of those banks renders it ridiculous to try: and there is no doubt that the banks sought foreign deposits on a large scale in full knowledge they were in trouble. I have never seen why the public should give the bank the freedom that deregulation implies but continue to act as if they were under control in some other ways.
The question hinged on the obligation of the state to set up and regulate a deposit guarantee scheme, and on the implications of that obligation where the scheme fails. ESA contended that there is an an obligation to actually make sure depositors are compensated, and that it falls on the state in the last resort. They relied on case law as well as on the directive itself. Iceland argued that there is no such obligation and pointed to the preamble to the directive which institutes this, where it is clearly envisaged that the banks will in fact pay the compensation. Since there were no banks left in Iceland they could not pay: and Iceland did not accept that the state was then obliged to pay, as guarantor of last resort. They also relied on the same case law (which was a european case not an EFTA one) and on the wording of the directive. A further plank of their argument is that if the directive were interpreted in that way it would amount to state aid, which is itself frowned on in european law and closely regulated if it does apply (see the requirement that RBS sell profitable parts of its business for just these reasons, outlined in another thread).
The court has accepted iceland's argument and has ordered the applicant to pay the legal costs. In the body of the judgement it notes that more recently the wording of the directive has been changed so that in future it appears that the state will be bound to ensure that depositors are paid: that is a worrying development for reasons which are amply outlined in Iceland's submission. It is not clear how that will affect things in the future, and that is not explored because it was not the applicable law at the time this happened. Under the directive as it stood at the time the remedy for any failure to pay was an action against the scheme itself and not an action against the state in which the scheme had its being. The judgment notes that there was an impact assessment produce in 2010 which discussed changes to the directive and that assessment also clearly expects that the DGS will be funded by the banking industry. There is no set proportion of funds to deposits laid down even in this later document. This is partly because of the way banks function: they cannot hold money which fully covers all deposits because that would be the same as insisting they do not lend money they haven't got: and if they did that even fractional reserve banking would be dead. The impact assessment takes the view that this would destabilise the whole banking system (hmmm.....like it is really stable at present? But that is another conversation) Paragraph 159 of the judgement is clear, as to what the directive means however
QUOTE
The payment obligation thus lies with the deposit-guarantee fund, and the
guarantee funds are to be financed entirely by the credit institutions. In
circumstances where the fund cannot meet depositors’ claims in the event of a
default by a member of the scheme, it is for the remaining credit institutions to
make up the difference. In other words, the bankruptcy of a financial institution
is covered – as in classic insurance systems – by the rest of the institutions active
in the market.
This is very like the arrangement in place for travel companies in this country, and is not an uncommon way of doing things.
The judgement goes on to state that the directive is unhelpful as to what should happen if the scheme fails but it is clear in paragraph 160 that the obligation does not fall on the state on the basis of this particular directive
QUOTE
How to proceed in a case where the guarantee scheme is unable to cope with its
payment obligations remains largely unanswered by the Directive. The only
operative provision that deals with non-payment is Article 7(6) of the Directive,
according to which depositors must have the possibility to bring an action against
the relevant scheme. However, an obligation on the State or a possible action
against the State in those circumstances is not envisaged in the Directive’s
provisions.
Iceland's argument that any such obligation would breach competition law and the limits on state intervention is also accepted in the following paragraphs, which I will not quote: they are there in the link if you are interested. But I do think that paragraph 166 is important and it says
QUOTE
Moreover, in its 2010 Impact Assessment, the Commission noted: “DGS [sc.
deposit-guarantee schemes] are financed by banks and the Commission intends
to maintain this requirement. That means that the budget of Member States is not
directly concerned by the DGS Directive. The recent crisis has shown that in a
systemic crisis, DGS may reach their limits. However, even if in such cases
governments stepped in under strict obedience of state aid rules, this would not
be triggered under a legal obligation in the DGS Directive and ‘viability for
Member States’ is therefore not subject of this impact assessment.” (Impact
Assessment, section 3.2, pp. 8-9.)
This is important because if the applicant's case were accepted it follows that consumer protection for depositors could bankrupt the state: that is that the interests of one group would prevail over all others: and the sole purpose of that would be to ensure confidence in the banking system. There could be no clearer indication of the priorities of the powers that be, and their total failure to understand the purpose of a government or a state, than this. I am glad it has been rejected and I hope that the amendments to this directive do not overturn that insight: if they do they should be resisted by all available means, for reasons which I hope are obvious.
Turning to the case law the judgement rejects the relevance of Paul and others (the main precedent relied on by both sides) because that case hinged on the liability of the german authorities arising from negligence in their banking supervision.
A secondary question was also considered and that revolved around the question of discrimination. This was because depositors in the Netherlands and the UK were treated differently from Icelanders who also used the bank. This argument also failed. Iceland took the view that the directive relates to consumer protection and that was irrelevant to the action they took. What they did was restructure their banking system, as they had to do to ensure that the consequences of bank failure (which are used to justify the bank bail outs all over the world) did not happen. In addition neither group of depositors actually got any money out of the DGS
This aspect of the case is of less importance, or perhaps less interest, to me. The judgement is in the link and can be read at leisure, if it is important to anyone
The other thing which is important has already been touched on: though it is not really about the judgement per se. That is the restructuring of the Icelandic banks. But I will take that to the banking thread
www.eftacourt.int/uploads/tx_nvcases/16_11_Judgment_EN.pdfEdited cos original link is broken
Edited by FionaK - 24/4/2014, 10:13
