UK banks in compensation deal over Icelandic failures British banks are to pay £1.1bn to reimburse savers who lost access to their deposits in Icelandic banks that failed in 2008. The payments, in three yearly tranches starting this month, will go to the Financial Services Compensation Scheme. The FSCS, which insures deposits in UK banks and some other investments in financial companies, will use the proceeds to repay a loan from the UK government due in April 2016. IN Banks The Treasury had footed the bill as the FSCS did not at the time have sufficient funding to honour deposit guarantees of up to £50,000 per person. Nor could Iceland's equivalent scheme honour its guarantee of about €20,000. The Treasury decided to reimburse retail depositors in full and has since aimed to recover its outlay from Iceland. In 2008, this caused friction between London and Reykjavik as Iceland did not accept the deposit protection scheme's obligations as a government liability. Its position was vindicated by an EFTA (European Free Trade Association) court ruling in its favour earlier this year. Reykjavik has, however, struck a compromise by which it may repay some of the UK Treasury's outlays should the money clawed back from the banks" estates fall short. The estate of Landsbanki, parent of Icesave, says it expects to repay depositors" claims in full. A law passed by Reykjavik when the banks collapsed gives depositors priority over other creditors in bankruptcy. The £1.1bn to be paid by British banks is the size of the shortfall the FSCS still estimates to face by 2016. Anthony Brown, chief executive of the British Bankers" Association, said: "These payments show that the system works and we hope it gives confidence to consumers that if there is ever another bank failure that their savings will be protected."