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MSE News: Savers' deposits to be ring-fenced from banks' investment arms

edited 30 November -1 at 1:00AM in Savings & Investments
18 replies 2.5K views
Former_MSE_HelenFormer_MSE_Helen
2.4K posts
edited 30 November -1 at 1:00AM in Savings & Investments
"Banks will be forced to ring-fence savers' cash from their risky casino-style investment arms to protect deposits ..."
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  • ReaperReaper Forumite
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    The banking sector argues the plan would push up the cost of business loans and mortgages, as bondholders could demand banks pay higher interest rates to offset the greater risk they face on investments
    Of course bond holders will demand more for the extra risk - but only because the risk is artificially low at the moment.

    The market is currently biased in the banks favour because those lending to banks know the government will be forced to prop them up no matter how irresponsibly they have been run.

    I approve of the government's plan and indeed would have preferred to go a lot further. I would like to have seen them forced to split investment banking and retail banking into 2 separate independent companies which raise money and survive or fail on their own.
  • talexusertalexuser Forumite
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    Reaper wrote: »
    I would like to have seen them forced to split investment banking and retail banking into 2 separate independent companies which raise money and survive or fail on their own.

    Exactly. Is this not effectively what Glass/Steagall Act was in the US before they stupidly got rid of it after many years of (expensive) lobbying from the banks?

    It makes me very wary of these blanket calls of deregulation since many regard getting rid of banking regulations as the direct precursor to the credit crunch and consequent taxpayer bailouts.
  • grumblergrumbler Forumite
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    risky investments will be held in a separate pot to savers' money. Risky loans and mortgages will also be held separately
    I wonder what is a 'non risky' investment nowadays? Governments bonds maybe?rolleyes.gif
    We are born naked, wet and hungry...Then things get worse. :(

    .withdrawal, NOT withdrawel ..bear with me, NOT bare with me
    .definitely, NOT definately ......separate, NOT seperate
    should have, NOT should of
    .....guaranteed, NOT guarenteed
  • ConsumeristConsumerist Forumite
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    "Banks say the move could drive up borrowing costs for consumers."

    Consumer borrowing costs are of little consequence to government but taxpayer-funded bailouts are. Savers already have FSCS protection up to £85,000 so this change will be of limited benefit to most of us.
    >:)Warning: In the kingdom of the blind, the one-eyed man is king.
  • Debt_Free_ChickDebt_Free_Chick Forumite
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    Seems somewhat counter-intuitive to have two businesses each with its own concentrated risk.

    Must be more to it than simply "protecting depositors' savings" as that could be achieved without breaking up the bank.

    End of so-called free banking I imagine ....
    Warning ..... I'm a peri-menopausal axe-wielding maniac ;)
  • oldvicaroldvicar Forumite
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    Banks will be forced to ring-fence savers' cash from their risky casino-style investment arms to protect deposits and avoid a run like that which brought down Northern Rock in 2007

    I fail to see how the splitting of bank's business in this way avoids a run on the bank like Northern Rock. First whiff of problems and depositors will be queueing round the block to take their mony out.
  • edited 15 June 2012 at 10:23AM
    MilarkyMilarky Forumite
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    edited 15 June 2012 at 10:23AM
    There's the headline, and then there's that 'nothing's-really-going-to-happen-yet-and-the-world-will-have-probably-ended-anyway-if-it-did' sort of detail I fully expect from this bunch
    Osborne is giving an important concession to banks angered by the proposals*, as smaller institutions will be exempt, as will overseas operations that are not considered a threat.

    The legislation will not come into force until 2015, if it is approved by Parliament, though the proposals are still open for consultation. Banks must only comply with the rules by 2019.

    *Why do they get a veto?
    .....under construction....
  • GeorgeHowellGeorgeHowell Forumite
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    The fact that the banks have lobbied so strongly against this measure strengthens my belief that it is the right thing to do.
    No-one would remember the Good Samaritan if he'd only had good intentions. He had money as well.

    The problem with socialism is that eventually you run out of other people's money.

    Margaret Thatcher
  • talexusertalexuser Forumite
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    The fact that the banks have lobbied so strongly against this measure strengthens my belief that it is the right thing to do.

    Precisely. The litany of mis-selling scandals over the years leading to the crunch should absolve them from any input into the reforms. Since the taxpayer has bailed out the entire system it is unbelievable that the banks should still have input into what regulations they want, and the population (taxpayers) should just accept whatever they say. The argument that the business will go abroad does not fly with me. Whatever we lose will be as nothing compared to the loss of GDP, savings, pensions and various recessions caused by bailing out failed banks and keeping their directors in bonuses.
  • edited 16 June 2012 at 1:58PM
    Gentoo365Gentoo365 Forumite
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    edited 16 June 2012 at 1:58PM
    I think that it is absolutely the right thing to gather opinions from bankers. The banks will outline the possible impacts of this move and explain the negatives for both the British economy and their customers.

    Then it is up to the government (on behalf of the voters) to decide if the price is worth paying to have a more sustainable banking sector.

    I agree with some of the suggestions, and disagree with some others. I also have strong opinions on other solutions.

    Briefly,

    1) Financial services regulations and compensation schemes will mean that the impact of a bank failure will not be felt by savings customers. Whilst this is a good thing it introduces moral hazard. Savings customers will no longer care if their bank is risk averse, nor will they worry too much about the customer service standards. This is because all banks will have to act in the exact same way. Timescales will be mandated, account terms will be equivalent and risk to consumers will be low.

    2) If customers only care about rate, the banks that collect the most deposits will be those that can obtain a highest rates. If you assume that returns on investment depend on risk taken then the result is that the banks that take the highest risk will be the most successful at obtaining deposits.

    3) Banks that are risk averse, or manage risk well, will be in the opposite situation. They will lose customers. They will be unable to obtain the required return on investment to pay the rates that customers demand. They will therefore either have to change their business model, or fail.

    4) Without access to investment banks, insurance companies and wholesale markets the retail banks will have to make a larger percentage of their income from mortgages.

    5) Due to combinations of the above facts the banks that survive will be those that take the greatest risk with lending. This is under the assumption that higher net income (after provisions and defaults) will only come from mis-pricing the risk. Again the 'winners curse' results in the bank that charges the lowest mortgage rate in relation to the customers risk profile being the one that wins the business.

    6) Some banks will decide to be risk averse when lending. In the hope that the income lost from higher rates will be gained from lower defaults. However in the long run these banks will lose market share from lenders that are willing to reduce rates further. To the point that the mortgages are loss making.

    7) The result will therefore be a banking system where the winners are those that take the most risk and the losers are those that price risk correctly.

    8) This is not significantly different to what happened prior to 2008. It just changes the investments from wholesale to retail.

    9) Therefore a further solution is needed. One that ensures that the moral hazard is removed. As we are unwilling to pass risk to consumers the solution must therefore be to limit the possibility of a more risky bank out competing a risk averse bank.

    10) I believe the solution is therefore to limit the rate at which banks can offer to customers who have insured deposits. One possible limit is the BoE rate. One is a new rate set by the regulator.

    11) This, I believe would result in risk averse banks being able to take deposits without having to offer unsustainable rates. There will still be banks that take undue risks with lending and investments in order to increase profit, however this impact of those failures will not be spread to the sustainable banks. As risky banks will not be able to 'steal' the customers by offering higher rates to tempt them away.

    12) In addition, some banks will offer higher rate accounts, but those will not be insured. Hence the government will not have to bail them out, nor will they have to intervene. Regulation will ensure that (as with investment ISAs) customers are aware that these accounts have a different risk profile.

    By the way, I have no idea why I numbered these points. Also I agree about the seniority of insured depositors over bondholders, but that is a whole other post.
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