The scheme will cost the government about £11m
The collapse of Iceland's government could delay talks to resolve the Kaupthing Singer and Friedlander (KSF) crisis, the treasury minister has said.
Depositors were unable to access their funds when the Isle of Man bank's licence was suspended in October 2008.
UK treasury officials have represented the island in talks with Iceland, which nationalised KSF parent bank Kaupthing, to retrieve savers' money.
Allan Bell said the collapse of its government would slow down proceedings.
On Wednesday Iceland's Conservative Prime Minister Geir Haarde announced the resignation of his cabinet, after talks with his Social Democratic coalition partners failed.
Mr Bell said: "Our link with Iceland has been through the Resolution Committee, which was set up to manage the affairs of the old Kaupthing Bank.
"Nevertheless, the resignation at this point of the entire Icelandic government I'm sure will have some impact on the negotiations which are taking place between the UK Treasury and the Icelandic authorities.
"But that might only be to perhaps slow down some of the proceedings, rather than actually arrive at a different solution."
The Isle of Man government has blamed the bank's demise on the UK government, which froze Icelandic bank assets during its economic troubles.
More than £870m was deposited by customers in KSF Isle of Man when it went into provisional liquidation on 8 October, according to documents lodged with the High Court.
A winding-up petition for the bank was adjourned twice while government officials sought an alternative to liquidation. A third hearing is scheduled for 29 January.
If the bank is wound up savers, many of whom have hundreds of thousands of pounds trapped in the bank, would only be able to claim up to £50,000 compensation.
Depositors can apply for a £1,000 interim payment from the government.