FSCS - How much of *everyone's* cash can they insure

tranquility1

In the event of an economic meltdown, can the FSCS really cover all of the people it says it can?  I heard someone say that in reality it can't even cover 1%.  I assume that the Treasury would then step in and have money printed to cover the shortfall?

dunstonh

The FSCS is funded by levies on all regulated financial services companies and has the ability to borrow from the Treasury. As we have a lender of last resort, everything should be covered, in theory.

eskbanker

FSCS can borrow from the Treasury if necessary, as in the 2008 financial crisis, as at https://www.fscs.org.uk/about-us/

We’ve recovered £20 billion from the 2008 bank failures and repaid all £20.5 billion borrowed from HM Treasury that year.

wmb194

In practice governments will (part) nationalise, broker mergers and otherwise prop up important banks before it gets to the point that the FSCS and other deposit protection schemes are called upon e.g., RBS, HBOS, Lloyds here and ABN Amro and ING in The Netherlands during the GFC.

tranquility1

wmb194 said:

In practice governments will (part) nationalise, broker mergers and otherwise prop up important banks before it gets to the point that the FSCS and other deposit protection schemes are called upon e.g., RBS, HBOS, Lloyds here and ABN Amro and ING in The Netherlands during the GFC.

The recently announced "bail ins" mean that public funds are no longer to be used for propping up failed banks etc.  This cost will now be borne by the investors.

But apparently the investors money is safe up to £85K, which is contradictory in a sense.  

Malthusian

If everyone insured by life insurance providers died, the insurers wouldn't be able to cover close to 1% of the sum they've committed to paying. That doesn't matter either and they can't even print money.

In the event of an economic meltdown nobody will care whether the FSCS can pay out enough worthless money to meet everyone's deposits or not, because the economy will have melted down.

In the event of a bog-standard collapse of a major bank, like those in 2008, either the FSCS will pay out or, as wmb194 said, it won't even get that far. The #1 priority of the government will be to ensure that depositors don't start queuing round the block en masse to withdraw their cash and stuff it under the floorboards, as that would turn a bog-standard banking crisis into economic meltdown.

tranquility1

Malthusian said:

If everyone insured by life insurance providers died, the insurers wouldn't be able to cover close to 1% of the sum they've committed to paying. That doesn't matter either and they can't even print money.

In the event of an economic meltdown nobody will care whether the FSCS can pay out enough worthless money to meet everyone's deposits or not, because the economy will have melted down.

In the event of a bog-standard collapse of a major bank, like those in 2008, either the FSCS will pay out or, as wmb194 said, it won't even get that far. The #1 priority of the government will be to ensure that depositors don't start queuing round the block en masse to withdraw their cash and stuff it under the floorboards, as that would turn a bog-standard banking crisis into economic meltdown.

Wouldn't be much point in drawing out the cash if it isn't worth the paper it's written on.


Hence why owning gold is a good insurance policy.

csgohan4

bare in mind FSCS will not generally cover one for making bad investments which go wrong

Sea_Shell

Malthusian said:

If everyone insured by life insurance providers died, the insurers wouldn't be able to cover close to 1% of the sum they've committed to paying. That doesn't matter either and they can't even print money.

In the event of an economic meltdown nobody will care whether the FSCS can pay out enough worthless money to meet everyone's deposits or not, because the economy will have melted down.

In the event of a bog-standard collapse of a major bank, like those in 2008, either the FSCS will pay out or, as wmb194 said, it won't even get that far. The #1 priority of the government will be to ensure that depositors don't start queuing round the block en masse to withdraw their cash and stuff it under the floorboards, as that would turn a bog-standard banking crisis into economic meltdown.

That made me wonder if the life insurance providers have been adversely affected by the excess deaths figures caused by Covid?   It's not made "the news" so it seems not to have.

How bad would the death rate have to have been, amongst the "insured" for it to really start to bite the industry.

wmb194

tranquility1 said:

wmb194 said:

In practice governments will (part) nationalise, broker mergers and otherwise prop up important banks before it gets to the point that the FSCS and other deposit protection schemes are called upon e.g., RBS, HBOS, Lloyds here and ABN Amro and ING in The Netherlands during the GFC.

The recently announced "bail ins" mean that public funds are no longer to be used for propping up failed banks etc.  This cost will now be borne by the investors.

But apparently the investors money is safe up to £85K, which is contradictory in a sense.  

As we saw with the GFC, what governments and central banks say when things are calm and what they do when a crisis comes along can be two very different things.

The idea of the bail-ins is to introduce a type of Chapter 11 i.e. the business can continue to operate whilst it is restructured and can include wiping out e.g., bond and hybrid capital holders. 'Bailing in' investors is hardly a new concept but the problem with the previous, non 'bail-in' set-up is that it effectively required the business to go bust before debt and hybrid capital investors could be wiped out. No matter what they say, if there's a scenario where a 'bail-in' won't steady the ship you can be sure governments will step in to save a systemically important bank/financial institution.

I seriously doubt any government will burn eligible depositors - most of whom will also be voters - within the insured limit as it would seriously harm the trust of the public in the FSCS. I think governments around the world learnt this lesson when the IMF and the Eurogroup (EZ finance ministers) proposed taxing all bank accounts in Cyprus to bail out two failing banks in the country and dismay rippled across the planet. Fortunately that proposal didn't pass in Cyprus' parliament.

jimjames

tranquility1 said:

Malthusian said:

If everyone insured by life insurance providers died, the insurers wouldn't be able to cover close to 1% of the sum they've committed to paying. That doesn't matter either and they can't even print money.

In the event of an economic meltdown nobody will care whether the FSCS can pay out enough worthless money to meet everyone's deposits or not, because the economy will have melted down.

In the event of a bog-standard collapse of a major bank, like those in 2008, either the FSCS will pay out or, as wmb194 said, it won't even get that far. The #1 priority of the government will be to ensure that depositors don't start queuing round the block en masse to withdraw their cash and stuff it under the floorboards, as that would turn a bog-standard banking crisis into economic meltdown.

Hence why owning gold is a good insurance policy.

Not really unless you have very small denominations and hold it yourself. Gold bars held elsewhere or ETF won't be much use.