£85k Savings Protection - Is it Smoke and Mirrors?

smithy009

Hi folks,

Having just read about the £85k savings protection in accounts being "100% safe" (http://www.moneysavingexpert.com/savings/safe-savings), the article then says:

- The FSCS (who run the protection scheme) does not have a pot of cash ready to pay out if a bank failed (i.e. the banks who are part of this scheme have not had to pay actual cash into a protected deposit account to cover all account holders up to £85k)

- FSCS can only request up to £4bn per year across all financial institutions signed up the the protection scheme, which they admit would not even cover a failure of the 25th biggest bank.

- The UK Govt will lend the rest of the money needed.

Is it just me or is this only half the story? If I have understood this correctly, it seems that the indebted UK Govt will "bail out" the FSCS?

If that is so, can anyone answer these questions:

- Where exactly would the UK Govt get funds to pay for this?

- Would the Govt "do a Cyprus" and play Robin Hood (with a twist) - that is, take up to 60% of funds over the protected amount from other savers to pay back those under the £85k amount?

- In fact, could the following actually happen?:

- Mr Bloggs has £200k in a savings account
- Bank fails
- Mr Bloggs no longer has access to his £200k (bank closes)
- Govt tries to save bank
- Govt seizes 60% of savings above protected £85k (£115k) to save the bank.
- Govt then lends £115k to FSCS
- Out of the £115k, FSCS pays £85k back to Mr Bloggs.
- Mr Bloggs can now access his £85k which was funded by his own savings over £85k...

I think I have missed something here, but is this in essence what would happen?

Does anyone understand the actual logistics of how this is happening in Cyprus?

opinions4u

If that is so, can anyone answer these questions:

- Where exactly would the UK Govt get funds to pay for this?

They will print it. As they did with the Icelandic banks and Bradford & Bingley failures.

- Would the Govt "do a Cyprus" and play Robin Hood (with a twist) - that is, take up to 60% of funds over the protected amount from other savers to pay back those under the £85k amount?

Potentially.

Linton

I think it's a misunderstanding to say that the Cyprus government took the deposits over E100K to pay for those below the threshold. My understanding is that the Cyprus banks were insolvent (ie couldnt pay their debts) and all money deposited was lost, at least until the banks' assets, creditors and debtors were understood. What was done was to use the limited IMF and EC money to cover the deposits up to E100K.

As to what would happen in the UK: in the short term the £85Ks could be covered by printing money though the simple existence of the government guarantee would make that unnecessary as the depositors wouldnt withdraw their savings into cash. If the failing bank was allowed to go bankrupt much of the depositors' money could well be recovered when the banks assets were sold and it's lendings repaid.

kidmugsy

Linton wrote: »

My understanding is that the Cyprus banks were insolvent (ie couldnt pay their debts) and all money deposited was lost, at least until the banks' assets, creditors and debtors were understood. What was done was to use the limited IMF and EC money to cover the deposits up to E100K.

That's my understanding too; the original proposal, however, was for a government "levy" - i.e. partial confiscation - on all bank accounts, whether or not the bank in question was bust, and whether or not the balance was below the protected amount. That may have been the stupidest economic idea I've seen advanced in a democracy in my lifetime. (Insofar as any part of the Eurozone periphery can be viewed as a democracy when it comes to economic matters.)

ManAtHome

Linton wrote: »

though the simple existence of the government guarantee would make that unnecessary as the depositors wouldnt withdraw their savings into cash

Thinking back to NR, I remember plenty of people in the queue(s) being interviewed were well under the FSCS guarantee at the time, so wouldn't be too sure...

Jegersmart

opinions4u wrote: »

They will print it. As they did with the Icelandic banks and Bradford & Bingley failures.

Potentially.

Yes, in very small cases like this they can make a guarantee and honour it, if they had to find 3 trillion gbp to cover the guarantees in a bigger scenario - they *could print it* but then £85k may buy you a bicycle at the end.

Saying they can print it is lazy and repeating misconceptions heard all over the internet.

J

opinions4u

Jegersmart wrote: »

Yes, in very small cases like this they can make a guarantee and honour it, if they had to find 3 trillion gbp to cover the guarantees in a bigger scenario - they *could print it* but then £85k may buy you a bicycle at the end.

Saying they can print it is lazy and repeating misconceptions heard all over the internet.

J

You've over-estimated the size of the personal savings market by around 200%.

And you can shove your lazy comment where the sun doesn't shine.

Bravehearted_2

opinions4u wrote: »

You've over-estimated the size of the personal savings market by around 200%.

And you can shove your lazy comment where the sun doesn't shine.

Not sure that's necessary.

Your suggestion IS a fallacy. Just upping and printing money will defeat the entire purpose of the guarantee.

Your 85k will suddenly be worth a ton lot less when it just about buys you dinner at a fancy restaurant. And do you have any actual reference for the personal savings market to conclude that 3 trillion is a 200% over estimation?

Rafter

Sorry Braveheart but O4u is spot on.

Banks can suffer losses on their loans of around 2-3% above what they normally expect to lose anyway before they need bailing out.

After that they have to start raiding the FSCS or their borrowings from other banks and investors in order to repay their depositors.

Ultimately if a very big bank failed, the government would have to provide this cash and because we have our own currency might just have to print it (as it has done with Quantative Easing following the failure of RBS and HBOS in order to stop lending to the economy crashing).

This has caused inflation and might lead to the rest of the world refusing to lend the UK money (which explains why the £ is weaker than it was in 2008) - in which case we would need a bail out from the IMF, austerity etc etc as we had in the 1970's and as Ireland, Cyprus and others (partly as a result of being a part of the Euro) have experienced.

In eurozone countries they have austerity, public sector wage cuts, higher unemployment. In the UK, with our own currency, we have inflation, a weaker currency but employment and houseprices and austerity measures have been milder which our politicians (of all colours) seem to think is better than the sharp shock experienced in some European countries and the USA.

The Bank of England website shows deposits from individuals at around £1.2 Trillion.

Smithy,

Your numbers are a bit of an extreme. Even in the case of Iceland, over 60% of loans were recovered.

Ultimately if you have over £85k in savings and are worried then split it between several banks.

R.

Naf

Even when I worked on the bank counter I thought the whole FSCS was a joke. People should be aware of the real risk of investing in a bank and make their decision where too save accordingly, not just chase the best rate, comfortable that their savings are 'protected'.

nilrem_2

IMHO Smoke and mirrors (as in the thread title) does sort of describe the whole banking system. the whole thing is built on trust, once that trust starts to crumble the whole thing falls apart.

If a major bank or institution were to be allowed to fail with savers being seen to lose money (even if it were only those with over £85k that lost out) people with only modest amount would lose trust in the system causing a massive run on all banks.

The main concern would then be how can I get enough food to eat because paper money would rapidly become valueless.(IMHO).