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

Radiantsoul

smithy009 wrote: »

- 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?

1. Presumably the government would borrow the money or print it. Then it would liquidate the assets of the bank in order to repay the borrowing. All the banks have more assets than liabilities, but it is likely to take awhile to realise them.
2. Maybe. It seems unlikely as the UK government can borrow more, can print money(it is not in the euro), UK banks have better capital and the UK is a financial center so allowing a collapse is unlikely.


A bank has Assets(loans to customers) which are equal to Liabilities(deposits + bonds) plus Capital(shareholders).

In the case of Cyprus the Assets were less than the Liabilities plus Capital, this was driven by a write down in assets(largely loans to Greece). The value of the Capital fell to zero(capital is a cushion for losses of asset value). In the UK this gap was plugged by the UK Financial Crisis government injecting cash as Capital into the system. In Cyprus the debts were too large for the small government and their were no bond holders to take the hit either. So the Liabilities needed to be written down, which meant depositors.

It is a complex system as if a liquidator has to liquidate a bank it can be difficult to obtain the full value of deposits and so the loses can increase further(ie repossessed house sell for a discount and cost money to repossess). And it may mean selling off assets quickly that are held as security and so reducing the value of other banks assets. This is because banks generally take security - often property against any loan and so if the value of the underlying security falls so does the asset the bank holds(the loan it has made). I believe liquidators are still working on BCCI which collapsed in the early 1990s.

So the UK government decided to intervene to prevent a systemic collapse. I believe it would do so again. The government would be more likely to print money to cover the banks liabilities. Also UK banks are better capitalised now.

Cyprus is more complex because many of the depositors are tax evaders or criminals. This meant Europe was less keen to bail it out.

jimjames

smithy009 wrote: »

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:



- 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...

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

As far as I'm aware it may actually be worse than this.

From what I understood in Cyprus only savings up to £85k that are protected. If you have over £85k you have no protection so in the Cyprus situation you will lose 60% of your whole savings.

If you have £85k all is protected. If you have £86k then you lose 60% of it.

I don't think they have published the full details yet but that is my understanding of it which may be wrong.

kidmugsy

jimjames wrote: »

If you have £85k all is protected. If you have £86k then you lose 60% of it.

... that is my understanding of it which may be wrong.

That policy is so potty that normally I'd laugh at the idea, but now ....

IronWolf

In the case of a large scale bank default the government would undoubtedly put withdrawl limits on accounts. This means your money is "safe" but everyone can't just withdraw their money.

This allows them to print the money to cover it but avoid huge inflation by it happening all at once.

Plus in the event of a bank default, it is usually followed by an economic crisis, as we saw with Lehman, were interbank lending dries up and deflation is a real risk.

pqrdef

As I understand it, FSCS is a compensation scheme, not a guarantee scheme. It doesn't keep banks functioning, it pays compensation to depositors for actual losses. This happens when the bank is off life support and in receivership, and the customers are in the queue with the other creditors, for a percentage of whatever the assets will fetch.

Then the FSCS plans to mail out cheques within 7 days. By cashing the cheque, you assign to FSCS your rights as a creditor.

innovate

Radiantsoul wrote: »

1. Presumably the government would borrow the money or print it.

Everybody seems to assume that any FSCS payments come from the government.

This is not so. The theory is that the compensation funds come from the contributions all deposit-taking UK regulated financial institutions need to contribute to.

If the FSCS does not have enough money for a particular compensation requirement, they may get a loan from the government. Or they may not. I hope we will never have to find out, but if there is a bank going bellies up next time, I sincerely hope the government just tells them to dig themselves out or go bust.

Facts about the FSCS funding: http://www.fscs.org.uk/industry/funding/

opinions4u

Bravehearted wrote: »

Not sure that's necessary.

Well I could have returned it with interest, but chose not to.

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

It's not a suggestion. It's what has already happened.

Your 85k will suddenly be worth a ton lot less when it just about buys you dinner at a fancy restaurant.

Yes. I never denied this. And when that doesn't work they'll come for your pension fund.

And do you have any actual reference for the personal savings market to conclude that 3 trillion is a 200% over estimation?

http://www.lloydsbankinggroup.com/media/pdfs/halifax/2010/50YearsofSavingsReportFINAL.pdf

The value of deposit based savings has also more than quadrupled (328%) in real terms over the past 50 years; increasing from £269 billion in 1959 to £1,153 billion in 2009.

smithy009

Thanks for everyone's comments so far - v. interesting discussion!

I think it is important to understand what all this really means for us as savers.

If you look back, say 15 years, banks were traditionally always seen as "safe as houses". Cash put in a savings account was not going to drop in value (like stocks and shares).

Today the language has changed. We have "secured" (<£85) and non-secured funds (>£85k). In Cyprus the "secured" funds are now "limited withdrawal" funds, so people no longer have control over their money, and have no idea when they will.

If you follow the downward trend, we eventually get to a point where putting our hard-earnt, and taxed savings into a bank is just as risky as any other "investment". For example, could you forsee a time in the near future when opening a basic current account comes with a financial warning which says:

"Your money is not secured. Remember banks accounts can go up as well as down".

My OP was really questioning whether the FSCS guarantee is simply rhetoric to create the illusion of security, when actually, in effect, if any of the top 24 UK banks go under, the scheme will have to be bailed out by the Govt's credit card (i.e. us).

I, like many of you I guess, have the pschological scars of the Icelandic bank collapse and am a "bailed out" saver (survivor?), so all this is very real to me.

I read somewhere recently that the G20 had agreed that they too can do what Cyrpus have done if needed. The essense of the article was that once you put the money in the bank, it belongs to the bank, not you, and in the case of a serious banking failure, it's not your money to decide what to do with.

Is anyone else coming to the conclusion that having cash in a bank is possibly the riskiest place to leave it right now?

And if so, what should you do with it?

grey_gym_sock

smithy009 wrote: »

The essense of the article was that once you put the money in the bank, it belongs to the bank, not you,

the bank does not keep "your money" separate - depositing money in a bank account is not like putting it in a safety deposit box in a bank. the bank owes you a sum of money. you are an unsecured creditor of the bank.

and in the case of a serious banking failure, it's not your money to decide what to do with.

yes: your money is not separate. the bank does owe you the same sum of money, but if they can't afford to pay all their creditors, you may not be paid in full.

it is reasonable to expect that the £85k guarantee should be honoured, though. and actually the experience of cyprus suggests that it could be politically impossible for it not to be honoured.

beyond that, you might be on your own.

smithy009

Thanks Grey - I understand that the bank does not keep the money tucked away in a box for you. What I am really referring to the changing perception that banks are no longer a "safe haven" for your life savings (although I still think there must be many people who still think they are, based on the fact that banks still exist in their current form).