If confidence is lost in the banks and the others

peterfleet

In Thursday evening's (9th December) TV programme, "The man who broke Britain", there was portrayed a what if scenario that showed the financial collapse in 2005 of much of this country's economy as a result of a fire at a giant Saudi oil terminal.

It showed the effects on ordinary people - their rush to draw their savings from the banks and building societies which then caused them to close; the collapse of the housing market, the loss of jobs, the loss of pensions, etc.

The programme suggested that this was possible because of the widespread international trading in over-the-counter derivatives admitted to be unregulated. It showed the effect of one greedy but unsupervised senior trader and his junior making massively risky huge deals that eventually went wrong when the world oil price soared.

As moneysavers rightly chasing the best interest rates and investment potential as well as the best buys, are we paying enough attention to the risks?

If we can't trust our savings institutions to honour their promises to us, where else can savings be securely lodged?

If we can't trust our pension schemes to deliver their promises, what alternatives are there?

Should we pressure our politicians to regulate the finance sector more vigorously?

Or should we pour ourselves another drink and put this all down to a bad dream?

Happy Christmas.

mary

Am not too well versed in these matters, but I thought we had the FSA which is supposed to do that - or is it a white elephant?

deemy2004

Relax

remember the first 35k (or so) of savings in EACH institution is secure (well okay 90% is).

Oil prices are headed higher regardless of whether its becuase of terrorism or consumption as supply is limited.

Now as we have seen the rise in oil prices is not likely to be orderly, but even if oil prices shot up to $75, I don't see the panic withdrawls or the collapse in the banking industry.

Now as for derivatives, YES banks DO gamble and do every now and then teeter on the brink of collapse, though they overly exageratted the ripple effects for dramtic purposes.

Look, weve had sumitomo, enron and a few others over recent years, and the banking system did not collapse.

These sort of things happen every few years and the banking system can and does cope with these small mosqueto bites. So don't worry !

Walletwatch

A run on banks, while not impossible is highly improbable in a developed market, where enough political pressure can be exerted to uphold the interests (and the principals ) of the account holders.

Any derivative instrument dealing can cause banks to go overboard, since this doesn't directly hit the Bank's financial statements (it is a contingent balance, and hence, the max exposure that it gets is as part of notes to accounts on the Bank's balance sheet) The various Accounting Standards bodies of the world are still proposing different ways to represent these exposures suitably on the balance sheets of various banks.

Don't think there is an end to it, if we start thinking on those lines... so as someone said, pour yourself another drink and forget about it

cgnao

See thread at

http://forum.moneysavingexpert.com/cgi-bin/yabb/YaBB.cgi?board=Savings;action=display;num=1102465174

MJSW

A run on a bank or building society is not as unlikely as you may think. In the early 1990s, I held an account with the Southdown Building Society. In August 2001 a rumour started that the society was in financial difficulties (which it wasn't in fact, at the time). In some branches queues started to develop as members tried to make large cash withdrawals from their accounts. The society did not hold enough cash in the tills to meet these unexpected withdrawals, so people got turned away at some branches when the cash ran out.

When people went and told the press that the society had no cash left in the tills, even more people turned up trying to make withdrawals from their accounts. Many branches had queues stretching out of the door as people tried to withdraw their money! This went on for several days.

The situation was getting out of control. The Building Societies Association had to release a statement saying there was no reason for members to withdraw their funds. The Woolwich agreed to provide up to £200m of funds to meet the panic withdrawals, to try and reassure the public that they weren't about to lose their money. This seemed to do the trick, and in the event none of the Woolwich's funds were actually needed.

Three months later, Southdown agreed a merger with the much larger Leeds Permanent Building Society. Southdown members got a 1% bonus added to their accounts. Leeds later merger with Halifax which converted to a plc, and so there was another windfall! All's well that ends well! ;D

Walletwatch

MJSW

At the expense of repetition

A run on banks, while not impossible is highly improbable in a developed market

I agree with you that this is not unlikely, but first of all, let us look at when the two cases that have been quoted happened, and also take into consideration, the fact that the original thread started off as a concern about banks getting into a cloy of derivative deals and risking too much capital. Not sure whether building societies have any restrictions as far as getting into such deals to trade on their own accounts, but that is one thing to consider.

Secondly, a run on the bank starts off exactly this way - some rumours which lead to some of the account holders withdrawing their money, and then spreading the news, leading to a domino effect. And it is common knowledge that banks would have only a percentage of the total of its overall savings amounts, as the bulk of it would have been lent out to the market. The only saving grace would be banks (or building societies) having to approach their respective Central Banks (The Bank of England in this case) as a lender of the last resort, which in itself would / should get alarm bells ringing, and action taken both by the Bank as well as external entities (incl the Govt to bail out the Bank and its account holders as a final resort) to rescue the account holder lot.

Of course what I have quoted are extreme measures, and upto a fixed amount of your savings in such a Bank is anyway insured for such occurences (I believe such an amount has been quoted as 35000 in this chain of posts, not sure abt that)

Personally, methinx that if this is such a big concern, follow the share market principle of not putting all your eggs in one basket, and having multiple savings accounts where you put say £30000 each, so that the bulk of your savings is protected - not always practicable, but you should probably do it if you are too bothered abt such occurences. I'd still maintain that there is no point losing sleep over the odds of these things happening.

deemy2004

Compensation stuff -

Deposits: £31,700 per person (100% of £2,000 and 90% of the next £33,000).
The Scheme is triggered when an authorised deposit taker, (such as a bank, building society or credit union) is unable, or likely to be unable, to repay its depositors. Joint account holders are each entitled to claim compensation to up to £31,700. The limit applies to the total amount a person has deposited with a firm, not each account held.

Investments: £48,000 per person (100% of £30,000 and 90% of the next £20,000).
FSCS provides protection if an authorised firm is unable to pay claims against it. For example:

for loss arising from bad investment advice, poor investment management or misrepresentation;
when an authorised investment firm goes out of business and cannot return investments or money.
Investments covered include: stocks and shares; unit trusts; futures and options; personal pension plans and long-term policies such as endowments.

Mortgage advice and arranging: £48,000 per person
From 31 October 2004 the Scheme will be able to pay up to £48,000 (100% of the first £30,000 and 90% of the next £20,000) for claims against authorised mortgage firms that are unable to pay claims against them.


Long-term insurance (e.g. pensions and life assurance) firms: unlimited, 100% of the first £2,000 plus 90% of the remainder of the claim. Policyholder protection is triggered if an authorised insurer is unable, or likely to be unable, to meet claims against it, for example if it has been placed in provisional liquidation or administration.


General insurance firms: unlimited:

compulsory insurance (e.g. third party motor): 100% of the claim.
non-compulsory insurance (e.g. home and general): unlimited, 100% of the first £2,000 plus 90% of the remainder of the claim.
Policyholder protection is triggered if an authorised insurer is unable, or likely to be unable, to meet claims against it, for example if it has been placed in provisional liquidation or administration.

General insurance advice and arranging* : unlimited, comprising 100% of the first £2,000 plus 90% of the remainder of the claim. Compulsory insurance is protected in full. *For business conducted on or after 14 January 2005.

So hmmm, you could say things are pretty safe

dag_2

Am not too well versed in these matters, but I thought we had the FSA which is supposed to do that - or is it a white elephant?

I don't think the FSA is a white elephant - but I think it probably depends on some degree of economic stability to be able to operate. As long as the economy is fairly healthy, the FSA will weed out the rip-off merchants. But if the economy goes belly up, the FSA is about as much use to you as a hatrack to a moose.

Look, weve had sumitomo, enron and a few others over recent years, and the banking system did not collapse.

Very good point. Then again, 1929 wasn't all that long ago.

Useful info from deemy - thanks for that.

InterPorkPies

Read the thread & check the date