Worth of FSCS when Govt coffers emptied ?

ANGLICANPAT

Was about to put money with Aldermore  bank - a 2yr fix, but have stopped to ponder  exactly what protection the Govt will be able to give in 'wartime' conditions. Once they finish  borrowing their thousands  billions and maybe trillions to keep the country going, especially the NHS if the virus repeats ,  help the country recover, compensate businesses , social welfare  etc etc  , how sure can we be that FSCS will be forthcoming in the form we understand it to be at the moment ie full payment? Could such an extraordinary situation as this pandemic  even mean that  down the line ,  savings  over  'x' amount will be considered as 'luxury' money that will have to be waived for the  survival of a country's economy  , or a scenario similar to that ? Thinking maybe the bigger banks a better bet despite piddling rates. 

Thrugelmir

During the Icelandic savings crisis there was insufficient money in the pot to fund the claims made. Subsequently the levy that all all Financial institutions was increased to recover the deficit. Lenders in turn passed this cost onto borrowers in terms of higher rates. As an example the hit to the Nationwide was in the region of £250 million a year. 
Governments have no money. We ultimately fund everything. In the shorter term the Treasury will sell debt to fund. 

Linton

FSCS is paid for by a levy on authorised companies, not the government.  In practice I guess it would be underwritten by the government who can always pay the relatively small amounts of money nvolved.

Of course anything could change in the future but if the guarantee was not honoured that would destroy the objective of protecting bank accounts which is to give people confidence that their money is safe and thus to prevent runs on the banks.

As to big banks being a better bet than small ones, that did not apply in 2008.

Thrugelmir

Linton said:

As to big banks being a better bet than small ones, that did not apply in 2008.

How many of the building societies that decided to become banks survived ? 

tropic_of_Username014

The government coffers cannot run empty. Because modern money is IOUs written by the government. The government has no money; it is the source of all money. Money springs into existence when the government pays it to somebody else (giving them an IOU). The government does not — and cannot — store up money in advance of spending it (because an IOU held by the same person who wrote it is meaningless).

Money is destroyed when somebody else pays it back to the government (returning their IOUs). Nearly all of this happens via taxation. A little has happened via the FSCS levy.

Taxpayers are not the source of money, because

1) That is not the order of events: taxation always comes after spending.

2) Taxation needs to recover well over 90% of the money that the government has spent into existence (or we would get very high inflation), but less than 100% of it. So it's wrong about the amount of taxation.

3) That misdescribes the dynamics of the economy. Government expenditure is often a driver of economic activity, which leads to taxation coming back to the government later on — and sometimes, it's a higher amount of taxation than than the amount of the original expenditure.

Selling government debt (gilts) is secondary; it only changes how government debt is funded, i.e. with with bonds (gilts) instead of with cash (bank reserves). QE (which may be used in the present crisis) is the reverse of this process, i.e. it reduces the amount of gilts in existence and increases the amount of central bank reserves. Both of these processes are just asset swaps (gilts for reserves, or reserves for gilts). The only factor that determines whether government spending is funded in the first place is whether everybody in the UK accepts the government's IOUs (i.e. £) in payment.

Getting back to the FSCS, it is (as Linton says) not that big relative to government finances. And the government would not like the consequences of not honouring the FSCS guarantees. So it would make no sense for them to do that.

worldtraveller

tropic_of_Username014 said:

Getting back to the FSCS, it is (as Linton says) not that big relative to government finances. And the government would not like the consequences of not honouring the FSCS guarantees. So it would make no sense for them to do that.

Indeed! I must admit though, that nevertheless, during the 2008/09 financial crisis, I personally opened, and have always kept open, an NS&I savings account, with just £1 in it, just in case I was ever in the position when I believed I should urgently, and be able to quickly, move cash over from a bank(s).

PS I just checked my last statement and it's now £1.08!

ANGLICANPAT

Thanks all,  very interesting . Fell happier about it now.   Think I might go ahead  with the Aldermore . The excitement of gettinig  c £15 or whatever per 1k each year is enormous . 

EdGasketTheSecond

The gov't can just 'print' some more money (well it's all done on computer nowadays).

Tildaplum

The government can issue as much money as it wants to repay as much fscs compensation as it needs to 

The consequence of course is that the currency becomes devalued and rampant inflation occurs. You only have to look back to World War II and the German economy

So there is no way the government can 'run out of money' -  it just 'prints' more and more and more if it needs to

That's devaluing the value of the pound but nevertheless repaying savers their £85,000

the fact that the £85,000 is now only worth £50,000 in real terms is just the consequence of what happens

worldtraveller

ANGLICANPAT said:

Thanks all,  very interesting . Fell happier about it now.   Think I might go ahead  with the Aldermore . The excitement of gettinig  c £15 or whatever per 1k each year is enormous . 

I'm assuming that you're maybe going to go for the '2 Year Fixed Rate Savings Account'.

Just don't forget that, "you cannot make any withdrawals, transfers out or closures before the maturity date." They do say that, in exceptional circumstances, "we may permit early withdrawals from or closure of the account prior to the maturity date but this is at our discretion, subject to evidence we will request, and we are not obliged to do so. In the event that we grant permission, we may deduct 180 days’ interest as a condition". That clearly means very little at all, in terms of under what circumstances, if any, they would exceptionally allow it!!

Therefore, if the proverbial did hit the fan, at any point in those 2 years (and these were very serious considerations back in 2008/09), you would very likely not be able to move any of your funds out at all if you felt that the bank was potentially at risk. Sure, you'd be covered by FSCS, but would clearly have to wait for funds to be paid out. Just saying, in case you weren't fully aware.

Also, if you haven't already, it may be worth reading the MSE "Are Your Savings Safe" page here:

https://www.moneysavingexpert.com/savings/safe-savings/#whatcounts

afis1904

FSCS is not funded by government and even if it was there's no reason why they would stop paying out. In the end government debt is nothing more than a number.

I think tropic of username described it quite well