Scrap deposit protection to avoid banking crisis

Graham_Devon

Thoughts on this? Personally I'm totally against this - and to be honest, I thought many things had already been put into place (they have been talked about lots!) to avoid a banking crisis.

However, would you be in favour of this? Would you be happy with no guarantees for your money if it helps avoid a banking crisis?

Maybe you'd be happier if the reward for your risk was higher?

Savers’ deposits should no longer be guaranteed by the Government, as this insurance has made the UK more prone to banking crises, a think tank has warned.

The Center for Policy Studies (CPS) said that after 40 years of “increasingly frequent, increasingly severe” banking crises, it was time to consider the abolition of deposit insurance, which guarantees the first £75,000 of each person’s combined savings at banks and building societies.

The CPS claimed in a new report that scrapping deposit protection would bring about “an end, in perpetuity, to the need for the state bail-outs of UK banks” and reduce the “moral hazard” it has produced.

Without the availability of a Government guarantee for their savings, consumers would “be required to become, more risk-aware in their choice of bank”.

http://www.telegraph.co.uk/finance/newsbysector/banksandfinance/12099986/Scrap-guarantees-for-savers-deposits-to-avoid-banking-crises-says-think-tank.html

CLAPTON

Graham_Devon wrote: »

Thoughts on this? Personally I'm totally against this - and to be honest, I thought many things had already been put into place (they have been talked about lots!) to avoid a banking crisis.

However, would you be in favour of this? Would you be happy with no guarantees for your money if it helps avoid a banking crisis?

Maybe you'd be happier if the reward for your risk was higher?


http://www.telegraph.co.uk/finance/newsbysector/banksandfinance/12099986/Scrap-guarantees-for-savers-deposits-to-avoid-banking-crises-says-think-tank.html

well, with that wall of money going into property for security what could go wrong?

Graham_Devon

CLAPTON wrote: »

well, with that wall of money going into property for security what could go wrong?

I would think things would go wrong before the money goes into property - more likely at the stage of people trying to withdraw the cash en masse.

princeofpounds

It's one of those areas where theory and pragmatism can conflict.


I'm familiar with quite a few countries that don't have this basic protection (or at a trivially low level), and who have suffered banking crises recently. They pretty much all decided to reinstate the protection afterwards.


The benefit is not so much in preventing the initiation of a banking crisis. It is rather more what happens after a run has started - the lack of protections means that you guarantee the ultimate freak-out by depositors once even the slightest run has started.


I do agree that it disrupts the theoretical idea that the cost at which a bank raises deposits should be affected by its creditworthiness, but frankly I don't think retail depositors have ever been a good judge of pricing that risk.


If you offer higher interest, they will come, regardless of how reckless the promise. Just as they will borrow at low interest rates, regardless of whether they will be able to truly pay.


Personally, I think the best model is to have the protection in place, but charge banks properly for the credit default insurance.


Most countries do charge banks, but typically do it in aggregate so that when a bad bank keels over, everyone takes a hit. I think it would be much better to charge on an individual basis if the mechanism can be derived. Buying the necessary credit default swaps would work for the larger banks with public debt, but may require some thought for smaller institutions.

michaels

The Abta/Atol model forces companies to lodge a bond to cover their liabilities in the event of bankruptcy and I suspect the cost of doing so depends on the creditworthiness of the company involved - perhaps it would be better to have a similar model for banks - although no doubt it would make banking more expensive overall.

Of course the current model is a complete confidence trick, in reality as Iceland demonstrated even the state is generally not solvent enough to stand behind such promises if they are triggered widely.

Generali

Graham_Devon wrote: »

Thoughts on this? Personally I'm totally against this - and to be honest, I thought many things had already been put into place (they have been talked about lots!) to avoid a banking crisis.

However, would you be in favour of this? Would you be happy with no guarantees for your money if it helps avoid a banking crisis?

Maybe you'd be happier if the reward for your risk was higher?


http://www.telegraph.co.uk/finance/newsbysector/banksandfinance/12099986/Scrap-guarantees-for-savers-deposits-to-avoid-banking-crises-says-think-tank.html

It's what I believe in. Why should the poor bail out rich savers? It's a ludicrous idea.

Banks, if deposits are to be insured, should be required to buy insurance from the Central Bank.

PasturesNew

Normal people's money needs to be protected. Lifetime savings could be wiped out otherwise. People buying/selling houses could find their entire profit/deposit wiped out.

Banks are there to keep the money/cash you take in safe.... bog standard, normal people's savings should be protected. It's nuts to suggest that this real money could simply disappear at the drop of a hat.

To suggest it could cause a crisis indicates to me that somebody, somewhere, is working a system where they put banks at risk .... that method needs to be found/stopped. Bigger boys, playing markets, who have found a system. Find that, stop that. Don't let granny's life savings ever be at risk.

Generali

PasturesNew wrote: »

Normal people's money needs to be protected. Lifetime savings could be wiped out otherwise. People buying/selling houses could find their entire profit/deposit wiped out.

Banks are there to keep the money/cash you take in safe.... bog standard, normal people's savings should be protected. It's nuts to suggest that this real money could simply disappear at the drop of a hat.

To suggest it could cause a crisis indicates to me that somebody, somewhere, is working a system where they put banks at risk .... that method needs to be found/stopped. Bigger boys, playing markets, who have found a system. Find that, stop that. Don't let granny's life savings ever be at risk.

If you want your savings to be safe then you need someone to provide you with a service and you should pay for that.

I need to keep my job. Perhaps other people should pay a bit more tax to ensure that I get to have it. I have children. Will nobody think of the asset managers.

CLAPTON

a solution to 'secure' banking is for deposit only banks like the original TSB ..i.e. they look after your money for fee and don't lend to anyone.

it would of course immediately stop all lending which would probably have noticeable effect on the general economy : just think no mortgages

michaels

Generali wrote: »

If you want your savings to be safe then you need someone to provide you with a service and you should pay for that.

I need to keep my job. Perhaps other people should pay a bit more tax to ensure that I get to have it. I have children. Will nobody think of the asset managers.

But the current scheme is charged for isn't it - the issue being that the charges may not be properly risk adjusted. The man in the street just doesn't have the resource in terms of time and knowledge to monitor a deposit taking institution to assess it credit worthiness and thus you would end up with a missing market and a reduction in economic activity as people only feel safe to deal in gold under the mattress - good business for security companies though....

ChiefGrasscutter

The P2P industry was wanting to do this - scrap the FSCS
.....now I cannot possibly think why they would want this!