Government Needs to Act to Avoid Unneccessary Fear

opinions4u

People usually value their savings.

The fear of losing them in a banking collapse is real, even if the likelihood of such an outcome isn't.

Logic says a struggling bank will be merged, acquired or nationialised. From a saver's perspective this means their money is safe.

The impact of the Financial Services Compensation Scheme in these uncertain times distorts the market for savings and also adds to the fear of savers.

It distorts the market because it encourages savers to seek out additional safety that isn't really needed. National Savings and Northern Rock are as 'safe' as the British Government, so at this point in time the money flows in. The Irish compensation scheme means savings with an Irish bank are now perceived as safer than the British banks too, because the Irish compensation limit is higher.

This distortion attracts additional flows of money from previously secure and sound banks and either benefits HM Government in the UK or, bizzarely, the banks in Ireland. On its own, this could significantly affect the liquidity of a bank.

Combine this with honest but sensationalist reporting (e.g. the B&B stories in the papers today, or last week's "Hellifax" headline) and you have created the potential for a two pronged run on a bank. Prong one is the "get all the cash out" (which may have happened anyway) and prong two is "get it all out except for the last £35k". This is often larger withdrawals that could do more damage to the balance sheet. Once a strong run on a bank takes hold and can't be reversed, the bank fails. The scheme has effectively contributed significantly to a situation that actually puts savers at greater risk than they would have been if it didn't exist.

The only solutions I can see are:

1) The Government states that all savings in UK licenced institutions are safe up to an unlimited amount or

2) The FSCS limit is increased substantially from the current £35k limit to, perhaps, £1m.

Both acts would need the state to have some say in what those deposit takers could then lend on, to ensure wrecklessness is removed from the market.

Unfortunately, this passes the risks to the taxpayer, which I would normally view as wrong. But with the FSCS as it stands, the scheme is already increasing the risk of a bank failing by destroying consumer confidence.

And a banking system without consumer confidence is doomed.

And a doomed banking system is short, medium and long term disaster for the UK economy.

Inaction on this by Brown and Darling could be the biggest ase of political negligence the people of this nation have ever suffered.

Oblivion

opinions4u wrote: »

Inaction on this by Brown and Darling could be the biggest ase of political negligence the people of this nation have ever suffered.

I agree with your analysis. It's not as if Darling and Brown haven't had time to make the needed changes. It is well over a year now since Darling, following the Northern Rock crisis, said it was a bullet that had to be bitten, referring to the FSCS guarantee limit. At that time he said he had £100k in mind and stressed the importance of returning confidence to the deposits market.

So far all he's done is sit on his hands. Pathetic!

Dave.

Farway

Far be it for me to defend the government, but the problem was the reluctance of the financial sector to put their hands in their pockets and stump up cash to put in a rescue pot, or do you think the taxpayer should always bail out failing instutions without them, and their shareholders contributing one penny?

The revised limit of 50K is due to be be debated once Parliamnet reopens

http://www.timesonline.co.uk/tol/money/savings/article4245750.ece

dunstonh

I'm personally fed up having to pay in each year to fund failing companies or those that have shirked their responsibilities. Ok, my contribution of a couple of thousand a year may be small fry but the fact is I have to pay for the failure of others. Most of whom have just closed up or shirked their responsibility and gone on to another job or company without any personal loss to them whatsoever.

purch

I'm personally fed up having to pay in each year to fund failing companies or those that have shirked their responsibilities

So you should be.....

The FSCS just means that Savers can seek out the highest paying Account without regard for how that institution operates it's business.

If investors (savers) actually thought about how a particular institution was able to offer such high rates, they might reconsider where they put their money !!!!

tradetime

purch wrote: »

If investors (savers) actually thought about how a particular institution was able to offer such high rates, they might reconsider where they put their money !!!!

Well now, I don't know, but I would say if you considered the highest deposit rates on offer at the moment, for significant amounts of money, and compare this to the rate they lend out at, I'd say they are all capable of matching the top rates if they wanted to.
I suspect perhaps you mean "why" they make the offer.
The answer to that would likely be that they want / need to build up their capital reserves, without doing a rights issue or a share sale diluting exiting shareholder positions. I'd go further to say that even assuming they didn't need to strengthen reserves, it would be prudent to do so in the current environment.
I wouldn't like to bet my life on the survivability of any specific institution, even though I realize that an HSBC is highly likely to be around at the end

purch

it would be prudent to do so in the current environment.

I'm not really referring to the 'current environment'

Back in the 'mists of time' before the credit cruch certain institiutions were always offering higher rates on deposits.

The public didn't need to, or bother to ask why they were, partly because the FCSC insulated them from reality.

Weall know what the reality is now ...........

Unneccessary Fear

Taking this slightly out of context..........but some 'fear' is necessary when taking the decison as to where to place your money.

Would you lend money to just any old person you met on the street ??

Probably No

But people lend their money to any old Financial Institution, Bank, B.S. or whatever irrespective of how sound their business is.......and the FSCS just adds a layer of 'respectability' to them

Extending the FSCS will just allow some of the less reputable to continue in business will their dodgy business models, while everyone else foots the bill.

tradetime

purch wrote: »

I'm not really referring to the 'current environment'

Back in the 'mists of time' before the credit cruch certain institiutions were always offering higher rates on deposits.

The public didn't need to, or bother to ask why they were, partly because the FCSC insulated them from reality.

Weall know what the reality is now ...........

Yeah, to be honest, I'd never given it any thought either before the recent crisis, though at that time the odds of a high street bank in this country going bust weren't much better that the odds of a lottery win. Definitely in interesting times.