Tuesday, July 01, 2008

Taxpayers Whacked Again


So our spineless rulers have caved in to the bankers yet again.

Instead of insisting on a proper deposit insurance scheme paid for in advance by the bankers, they've whacked us taxpayers with yet another open-ended contingent liability. In future if a bank goes bust, we have to rescue the depositors and hope maybe one day some day to get our money back from those generous bankers. Ex the pavement queues (hopefully*), it's a formalisation of the Crock bail-out method - aka the Bad Method.

So why do we have to accept this? Why can't we have a system like the US Federal Deposit Insurance Scheme?

We blogged the FDIC here and here. In brief, it provides deposit insurance (generally up to $100K) in exchange for insurance premia paid by participating banks - ie not the taxpayer. And in normal times premia are quite low: according to the FDIC's report, in 2006 it insured $4.1 trillion of deposits on a premium income of only $32m (a mere 0.0008% of deposits).

But it has built up a healthy war-chest over the years (c $50bn at end-2006) because it charges bankers premia upfront - just like normal real-world insurance. And if there is a crisis (like in the early 90s) and it has to pay out more heavily than allowed for, it simply jacks up its subsequent premium rates until it's rebuilt its reserves.

Of course we know why the bankers don't want it here - over the next several years premia might well run into billions. But the FDIC system has worked well for 75 years providing clarity and protection for depositors. And the bankers all understand it's a condition of doing biz onshore the US.

So WTFFF hasn't that been done here?

Gah... no, let's rephrase that... when can we get rid of this wibbly wobbly bunch of limp-wristed wusses and get some political leadership? Some politicos who might just occasionally defend taxpayers' interests.

PS Those new Special Resolution measures for failing banks also sound like a dog's breakfast. If we understand correctly, the FSA will decide when a failing bank needs to be taken into Special Resolution (yeah, like they're BIG experts - see this blog), but they then phone up the Bank of England and drop the whole problem in the Bank's lap. Does that sound like a return to joined up regulation? Thought not.

*Pavement queues - so the deposit insurance limit is £50 grand right? And according to the bankers that will cover 95% of all retail depositors. But IIRC, many of the people who were actually queuing on pavements outside the Crock told interviewers they had much more than that deposited - £100K, £150K, even £200K. And they're the 5% of depositors who will be first on the pavement outside the next one. Unless of course, they've had the good sense to put their cash back with the Crock, now fully guaranteed for ever by UK taxpayers (currently 6% on instant access e-saver, and 6.35% on fixed term bonds).


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