Government to allow banks to fail

sadabbott

Help me understand this.

The banks are run for the shareholders and are in business to make money.

So they are stupid and lend money to people that cannot afford to repay their loans.

If the government refuse to bail them out, what will happen?

Shareholders lose their money - thats the price of investing in a bad company.

Depositors get back £35k / £50k or whatever.

What is the problem? Let it happen.

Aegis

The problem is that people with over £35/50k lose the excess.

In addition to that, it becomes the job of the financial companies who DIDN'T fail to effectively pay for the compensation to the depositors in their ex-rival, even if they have no lending whatsoever.

Following on from that, the knock-on effect on the confidence of depositors in the rest of the banking system could easily trigger another run on one or more of the other banks, which could have further serious repercussions on the whole UK economy.

All in all it makes a lot more sense to help out the troubled organisations than it does to let them go bust.

codger

I can appreciate the OP's sentiment. But aegis's post says it all.

And as someone else remarked recently, though it's understandable to blame a property owner for being so careless with a cigarette as to burn down his own home, you're still going to have to ring for the Fire Brigade to stop the flames engulfing other homes either aside.

The fact is that the top management of all those banks and building societies that behaved recklessly in pursuit of profit have, quite literally, laughed all the way to the bank: there cannot have been a dinner table anywhere around which this venal bunch didn't congratulate each other on being in a position where, if the worst ever came to the worst, they'd be all right Jack and someone else would pick up the tab.

But knowing where they were during the so-called boom years isn't really the issue here. It's where the regulators were. Sadly, to judge from the conduct of the FSA, they were too often dining out at the same table.

The_One_Who

The thread title is a little misleading, and not really related to the thread content.

For the government to allow a bank to fail would effectively be the final nail in the coffin for the UK banking industry. It would prompt people to remove their savings from their non-struggling bank and then it's a downward spiral from there.

No one knows what would happen if the FSCS were to be needed with the collapse of a large high street bank. My feeling is that it either couldn't cope or would take years for depositors to get back their cash.

sadabbott

I think that interventionist policies prolong the agony and make the inevitable more painful.

The government should allow sick businesses including banks to fail. Depositors protection should be funded as an insurance premium. If the insurance company sees you as a bad risk then they raise the premium and the feedback causes banks to be responsible.

In the same way as reckless car drivers should pay higher premiums. If everyone becomes reckless then everyone's premium goes up.

Now is that a good idea or what? I should be chancellor.

peawack

Expect an announcement that ALL deposits will be guarenteed, now that the Germans have broken rank.
Even though the credit crunch has been caused by greed and self-interest, the consequences of not bailing out the banks will be catastrophic for us all.

The_One_Who

sadabbott wrote: »

I think that interventionist policies prolong the agony and make the inevitable more painful.

The government should allow sick businesses including banks to fail. Depositors protection should be funded as an insurance premium. If the insurance company sees you as a bad risk then they raise the premium and the feedback causes banks to be responsible.

In the same way as reckless car drivers should pay higher premiums. If everyone becomes reckless then everyone's premium goes up.

Now is that a good idea or what? I should be chancellor.

Banks are a little bit different.

Should Joe Public be punished for choosing to go with a high street bank that just so happens to have been careless with its lending? In my opinion, no, he shouldn't. Those who own the bank and those responsible for running it should, but not the person who has put their hard earned money into it. He has no input into how that bank is run.

Since the Compensation Scheme hasn't been properly put to the test no one can say how efficient it would be to get money to depositors.

sadabbott

The_One_Who wrote: »

Banks are a little bit different.

Should Joe Public be punished for choosing to go with a high street bank that just so happens to have been careless with its lending? In my opinion, no, he shouldn't. Those who own the bank and those responsible for running it should, but not the person who has put their hard earned money into it. He has no input into how that bank is run.

Since the Compensation Scheme hasn't been properly put to the test no one can say how efficient it would be to get money to depositors.

I do not believe any depositor should lose their money. I think that the shareholders should. The government should not bail out the bank - let it sink. Just look after the depositors - all of them.

The_One_Who

And all their cash, or just some of it? And what about loans, mortgages etc?

cheerfulcat

While I agree in principle that a failing company should be allowed to go to the wall, in this case it's far more complicated, since a) the problem is systemic and b) it's about trust in the wider financial structure.

As far as shareholders losing their money - this will almost certainly happen somewhere along the line. At the very least they will be heavily diluted. But bear in mind that most shareholders are not " fat cats " smoking cigars and quaffing champagne - they are pension funds and investment funds, held by the man in the street.

geepster

sadabbott wrote: »

I do not believe any depositor should lose their money. I think that the shareholders should. The government should not bail out the bank - let it sink. Just look after the depositors - all of them.

I have sympathy with this view. The shareholders certainly know the risks when they invest (or they should). However, I am quite sure that most people who put their hard earned money in the bank, don't have a clue as to the risks the banks are taking and whether or not their lending policies take the bank precariously close to collapse. All most people want is a decent return on the money they have deposited and to know it's safe.
The directors of banks have a lot to answer for They earn HUGE salaries which, in the main, are simply not deserved. The former board of NR and the board of B&B are a disgrace imho for the way they transacted business.:mad: