Raising FSCS Protection Limit

1spiral

I was going to post this reply in the Birmingham bank thread but rather than send that thread off track I thought I'd start a new one.

I had someone elses bank statement sent to me once. They had just shy of 500K in their current account.

Now OK 500K is a lot but I suspect it was pretty much all of their life savings. I assumed some old retired couple in their 70's. If their bank (Barclays) had gone under, I'm pretty sure they'd miss the 415K that wasn't covered.

As any catastrophic failure of a big bank is likely to be bailed out anyway, I wonder what impact raising that limit to say 500K or even 1M would have.

As banks only need a finite source of funds I would've thought the problem is self limiting.

Lets say very small bank y requires 8.5m, currently they may get to that with 100 deposits of 85K.

If the limit was raised to 500K, they may get there with 17 deposits of 500K.

Either way, the bank would stop new deposits when its demand is met and the FSCS protection would still pay out 8.5m, just to fewer people in the second scenario.

I'm struggling to come up with any reason as to why there is any attempt to limit protection at a level which is about 1/4 of the average house price other than there are a lot of people like the couple mentioned above that have excess funds in their bank accounts and the government really aren't bothered about protecting them officially.

masonic

The main issue is small banks, building societies, credit unions etc taking the p and offering unsustainable rates, then going bust. Other financial firms then have to pick up the tab, meaning interest rates and the cost of financial services in general are worse for the rest of us. We've seen this in action in the energy sector, and paid the price through our standing charges.

On the one hand, there is a desire to promote competition in the sector by making every authorised institution appear equally safe, but this is hit with the reality that they really aren't equally safe.

born_again

1spiral said:

I was going to post this reply in the Birmingham bank thread but rather than send that thread off track I thought I'd start a new one.

I had someone elses bank statement sent to me once. They had just shy of 500K in their current account.

Now OK 500K is a lot but I suspect it was pretty much all of their life savings. I assumed some old retired couple in their 70's. If their bank (Barclays) had gone under, I'm pretty sure they'd miss the 415K that wasn't covered.

As any catastrophic failure of a big bank is likely to be bailed out anyway, I wonder what impact raising that limit to say 500K or even 1M would have.

As banks only need a finite source of funds I would've thought the problem is self limiting.

Lets say very small bank y requires 8.5m, currently they may get to that with 100 deposits of 85K.

If the limit was raised to 500K, they may get there with 17 deposits of 500K.

Either way, the bank would stop new deposits when its demand is met and the FSCS protection would still pay out 8.5m, just to fewer people in the second scenario.

I'm struggling to come up with any reason as to why there is any attempt to limit protection at a level which is about 1/4 of the average house price other than there are a lot of people like the couple mentioned above that have excess funds in their bank accounts and the government really aren't bothered about protecting them officially.

FSCS is funded by the Gov. IE taxpayers...

It used to be lower. There is no way that it would go up to such a limit. 

masonic

born_again said:

1spiral said:

I was going to post this reply in the Birmingham bank thread but rather than send that thread off track I thought I'd start a new one.

I had someone elses bank statement sent to me once. They had just shy of 500K in their current account.

Now OK 500K is a lot but I suspect it was pretty much all of their life savings. I assumed some old retired couple in their 70's. If their bank (Barclays) had gone under, I'm pretty sure they'd miss the 415K that wasn't covered.

As any catastrophic failure of a big bank is likely to be bailed out anyway, I wonder what impact raising that limit to say 500K or even 1M would have.

As banks only need a finite source of funds I would've thought the problem is self limiting.

Lets say very small bank y requires 8.5m, currently they may get to that with 100 deposits of 85K.

If the limit was raised to 500K, they may get there with 17 deposits of 500K.

Either way, the bank would stop new deposits when its demand is met and the FSCS protection would still pay out 8.5m, just to fewer people in the second scenario.

I'm struggling to come up with any reason as to why there is any attempt to limit protection at a level which is about 1/4 of the average house price other than there are a lot of people like the couple mentioned above that have excess funds in their bank accounts and the government really aren't bothered about protecting them officially.

FSCS is funded by the Gov. IE taxpayers...

It used to be lower. There is no way that it would go up to such a limit. 

It's funded by a levy on authorised firms. The only time the Govt gets involved is when the Treasury loans the FSCS money, like happened in 2008, but this is repaid. We all pay for it through our use of financial services.

wmb194

born_again said:

1spiral said:

I was going to post this reply in the Birmingham bank thread but rather than send that thread off track I thought I'd start a new one.

I had someone elses bank statement sent to me once. They had just shy of 500K in their current account.

Now OK 500K is a lot but I suspect it was pretty much all of their life savings. I assumed some old retired couple in their 70's. If their bank (Barclays) had gone under, I'm pretty sure they'd miss the 415K that wasn't covered.

As any catastrophic failure of a big bank is likely to be bailed out anyway, I wonder what impact raising that limit to say 500K or even 1M would have.

As banks only need a finite source of funds I would've thought the problem is self limiting.

Lets say very small bank y requires 8.5m, currently they may get to that with 100 deposits of 85K.

If the limit was raised to 500K, they may get there with 17 deposits of 500K.

Either way, the bank would stop new deposits when its demand is met and the FSCS protection would still pay out 8.5m, just to fewer people in the second scenario.

I'm struggling to come up with any reason as to why there is any attempt to limit protection at a level which is about 1/4 of the average house price other than there are a lot of people like the couple mentioned above that have excess funds in their bank accounts and the government really aren't bothered about protecting them officially.

FSCS is funded by the Gov. IE taxpayers...

It used to be lower. There is no way that it would go up to such a limit. 

No, it's industry funded but the government will lend it money if necessary. One of the problems with increasing the coverage is that the annual fees members have to pay will also increase.

ColdIron

born_again said:

1spiral said:

I was going to post this reply in the Birmingham bank thread but rather than send that thread off track I thought I'd start a new one.

I had someone elses bank statement sent to me once. They had just shy of 500K in their current account.

Now OK 500K is a lot but I suspect it was pretty much all of their life savings. I assumed some old retired couple in their 70's. If their bank (Barclays) had gone under, I'm pretty sure they'd miss the 415K that wasn't covered.

As any catastrophic failure of a big bank is likely to be bailed out anyway, I wonder what impact raising that limit to say 500K or even 1M would have.

As banks only need a finite source of funds I would've thought the problem is self limiting.

Lets say very small bank y requires 8.5m, currently they may get to that with 100 deposits of 85K.

If the limit was raised to 500K, they may get there with 17 deposits of 500K.

Either way, the bank would stop new deposits when its demand is met and the FSCS protection would still pay out 8.5m, just to fewer people in the second scenario.

I'm struggling to come up with any reason as to why there is any attempt to limit protection at a level which is about 1/4 of the average house price other than there are a lot of people like the couple mentioned above that have excess funds in their bank accounts and the government really aren't bothered about protecting them officially.

FSCS is funded by the Gov. IE taxpayers...

Neither

It's an industry funded scheme employing an annual levy on its members

https://www.fscs.org.uk/about-us/funding

1spiral

masonic said:

The main issue is small banks, building societies, credit unions etc taking the p and offering unsustainable rates, then going bust.

But surely that should be monitored and what's to stop them doing that with an 85K cap. If they really do play that fast and loose, surely they shouldn't have been granted a license in the first place.

GeoffTF

1spiral said:

masonic said:

The main issue is small banks, building societies, credit unions etc taking the p and offering unsustainable rates, then going bust.

But surely that should be monitored and what's to stop them doing that with an 85K cap. If they really do play that fast and loose, surely they shouldn't have been granted a license in the first place.

It has long been government policy to have competition. That requires small banks with weaker finances to enter the market. Nobody is going to put their money in a small bank with weak finances without a guarantee. Governments periodically reduce banking regulation in the hope of increasing economic growth. That leads to failure of some the biggest banks. Governments do not want to bail them out.

ranciduk

1spiral said:

I was going to post this reply in the Birmingham bank thread but rather than send that thread off track I thought I'd start a new one.

I had someone elses bank statement sent to me once. They had just shy of 500K in their current account.

Now OK 500K is a lot but I suspect it was pretty much all of their life savings. I assumed some old retired couple in their 70's. If their bank (Barclays) had gone under, I'm pretty sure they'd miss the 415K that wasn't covered.

As any catastrophic failure of a big bank is likely to be bailed out anyway, I wonder what impact raising that limit to say 500K or even 1M would have.

As banks only need a finite source of funds I would've thought the problem is self limiting.

Lets say very small bank y requires 8.5m, currently they may get to that with 100 deposits of 85K.

If the limit was raised to 500K, they may get there with 17 deposits of 500K.

Either way, the bank would stop new deposits when its demand is met and the FSCS protection would still pay out 8.5m, just to fewer people in the second scenario.

I'm struggling to come up with any reason as to why there is any attempt to limit protection at a level which is about 1/4 of the average house price other than there are a lot of people like the couple mentioned above that have excess funds in their bank accounts and the government really aren't bothered about protecting them officially.

So you opened someone else’s mail?

Uriziel

I think you are misunderstanding how the limit works. It does not mean that you will "only" get 85k. It means that 85k are guaranteed but they WILL try to compensate you for the entire amount if they are bailed out and not only the 85k.

friolento

Uriziel said:

I think you are misunderstanding how the limit works. It does not mean that you will "only" get 85k. It means that 85k are guaranteed but they WILL try to compensate you for the entire amount if they are bailed out and not only the 85k.

This is not a given. A bailout does not guarantee that the depositors get 100% of their money back. The purpose of a bailout is to keep the company alive as a going concern. Given the enormous efforts over the past few years to make people aware of FSCS, I would think it would be unlikely that anyone would get more than is covered under FSCS. Nobody can reasonably claim these days that they couldn’t know about the limit.