OPINIONS: Government Bank Deposit Guarantee

uk1

Understanding the technical £50k current limit on bank deposits, in practice do others share the opinion that there is effectively a 100% no-limit guarantee for private depositors in UK banks at least? In particular the Halifax with it's large government (public) shareholding?

To save effort I understand it is safer to spread, I'm just seeking opinions about the practical risks of the government allowing depostiors to lose any cash in banks that it holds shares in.

Thanks in advance.

dunstonh

The FSCS is funded and provided by the financial services companies (that are FSA authorised). It is not a government guarantee. However, the Govt will provide loans to the FSCS which need to be repaid.

in practice do others share the opinion that there is effectively a 100% no-limit guarantee for private depositors in UK banks at least?

The Govt cannot come out and say that as there are not the funds available to back such a guarantee. However, it has shown that where necessary it would step in and protect major brands.

uk1

dunstonh wrote: »

The Govt cannot come out and say that as there are not the funds available to back such a guarantee. However, it has shown that where necessary it would step in and protect major brands.

Thanks.

I have always been puzzled as to why it cannot come out and say that there is a 100% guarantee. Effectively there seems to be one. But the government doesn't derive any of the confidence benefits it would gain by saying so. It also adds to the "merry go round" of substantial funds chasing best available rates over several banks. It skews competition a bit for large funds.

Apart from the highly unlikely event of the government being unable to fund - what other reasons are there for not making the 100% guarantee explicit?

StevieJ

uk1 wrote: »

Thanks.

I have always been puzzled as to why it cannot come out and say that there is a 100% guarantee. Effectively there seems to be one. But the government doesn't derive any of the confidence benefits it would gain by saying so. It also adds to the "merry go round" of substantial funds chasing best available rates over several banks. It skews competition a bit for large funds.

Apart from the highly unlikely event of the government being unable to fund - what other reasons are there for not making the 100% guarantee explicit?

The govt want the deposits spread around, if the govt gave 100% guarantee people would go for the higher tiered rates and cash funds would become more concentrated in fewer banks.

dunstonh

I have always been puzzled as to why it cannot come out and say that there is a 100% guarantee.

It could do more damage to the Govt if it was to come out and guarantee the lot. When Govts make promises that people know cannot be met it undermines their credibility. If every bank was to fail there is not the money available to cover the lot. So the Govt cannot say it.

You also need to remember that things have moved on since the early stages of the credit crunch. Northern Rock was nationalised. Bradford & Bingley used the FSCS in a totally different way to what was intended. Now the approach is to recapitalise the banks in exchange for shares. The FSCS isnt coming into play with this current approach.

Apart from the highly unlikely event of the government being unable to fund

You say its unlikely but it is fact. It is not financially possible for the Govt to provide loans to fund all deposits.

uk1

dunstonh wrote: »

You say its unlikely but it is fact. It is not financially possible for the Govt to provide loans to fund all deposits.

But at the very moment the government states that it will offer a 100% guarantee doesn't that put an immediate stop on a bank run thus meaning it will be highly unlikely ever to need to provide the funds - and borrow the cash? Doesn't the lack of such a guarantee make a run more likely if the system gets the jittters?

opinions4u

A 100% government guarantee has a number of potential pitfalls.

1) It could attract funds from overseas to the UK which could destabilise banking internationally.

2) It could encourage foreign players to operate in the UK where it would be harder for the FSA to understand their business model.

3) It could encourage banks to operate a higher risk business model.

4) It could potentially do far more damage to sterling if the international markets viewed the UK government's liabilities to include all bank deposit liabilities.

I believe UK bank savings for personal investors are around double the annual tax take of HM Treasury.

Short term nationalisations are far more preferable to 100% guarantees.

uk1

I do not know the figures - hence a wild generalisation. But doesn't the £50k guarantee represent 99% of the potential exposure and a 100% guarantee represent little incremental risk? I would have though attracting large funds from overseas would minimise the risk rather than add to it?