Wednesday, Jun 18, 2008
And the next bank is...?
Guardian: Northern Rock had Secret Plan
Scares me to think that by the time I have found out that an irresponsible bank is in trouble, it might already be to late to get my money out. Best get cash out of some of the more dodgey ones now.
Posted by inbreda @ 10:02 AM (1549 views) Add Comment
25 Comments
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1. str 2007 said...
Does anyone have an opinion or article relating to the FSA 35k insurance and how robust it is?
IE if 2 banks went under (or 1 big one) is there enough money behind this headline to compensate all savers?
Who is the insurer?
Is it the Bank of England who will effectively just place an order with the Mint to print the amount of lost money ?
And re: NR unlimited compensation scheme, does anyone know how much they have in savers money and can the Bank/Government back up their guarentee ?
2. landofconfusion said...
str 2007 @ 1
From what I can remember there is no 'pot' as such just an agreement between the FSA and the banks to the effect that should one of them fail, the others will use their own profits to compensate the savers.
3. cornishman said...
"the others will use their own profits to compensate the savers."
- inspires you with confidence, doesn't it?
4. jack c said...
Guy's - this is covered by the FSCS (Financial Services Compensation Scheme) and there are three cataegories (1) Deposit taking firm (2) Insurance Firm (3) Investment firm. The FSCS is funded by a levy on FSA regulated firms.
FSCS is an independent body, set up under the Financial Services & Markets Act 2000 as the UK's compensation fund of last resort for customers of financial services firms. This means that FSCS can pay compensation to consumers if an authorised financial services firm is unable, or likely to be unable, to pay claims against it. Service is free to consumers. Authorised firms are those regulated by the UK's financial watchdog, the Financial Services Authority (FSA) or previous financial regulators.
www.fscs.org.uk/consumer/ for those who want to read more.
Hope this helps and clarifies situation
5. sosoon said...
If my memory serves me correctly there was a TV program on sometime ago, the question was asked regarding the 35K protection thing, it was established that there was only enough money in the pot for the 17th largest bank to offer protection. So if two banks faced insolvency, they would have to be pretty far down the chain to be protected by the pot.
This program also championed the protected 35K. My understanding is the fist 2K is protected 100% and 33K is protected 90%, giving total protection of £31,700 for each banks policy, shared over different brands.
6. inbreda said...
Still - makes me think that a policy of buying gold and burying it in the back garden is a darn sight safer than entrusting it to the crooked banks and politicians. Also can't help thinking that this particular viewpoint is about to become globally more common soon.
7. cornishman said...
@ inbreda
yes - but whose back garden do you bury the gold in? Do you buy a house first (in order to have your own...)?
8. landofconfusion said...
jack c @ 4:
>
> The FSCS is funded by a levy on FSA regulated firms.
Funded? Yes but in the event that a firm goes bust...
I can't remember where I saw it but from what I can remember there is no pot as such. Have a look at this document:
http://www.fsa.gov.uk/pubs/discussion/dp06_01.pdf
2.8:
"The basis of the current FSCS finding structure is that it is an industry-funded scheme: participants in the industry have to pay to meet liabilities generated by other firms no longer in business. The scheme operates on a 'pay as you go' basis, in the sense that there is no long term fund. Rather the FSCS can only aim to raise enough to cover its expected compensation cost outgoings over the 12 months from the date of levy."
So to quote: "participants in the industry have to pay to meet liabilities generated by other firms no longer in business." and "there is no long term fund".
Oh dear.
9. jack c said...
@8. landofconfusion - the FSCS isnt ideal by any means but thats what we are currently stuck with - for those that are in the industry many see it as a totally unfair system because several firms have run businesses poorly, accrued many liabilities which they couldnt subsequently meet (pension transfer business being a prime exammple) and then dumped those liabilities on the FSCS. To make matters worse they then set up trading again with a clean slate as a "phoenix company". The worst example of this (IMO) was AMP (Pearl) takeover of Towry Law (IFA firm). Effectively the last man standing would be forced to meet the levy which of course they could never do.
If the public at large were panicked into withdrawing money Northern Rock style across a few major Banks the present scheme (IMO) definitely wouldnt cope - Treasury backing would again need to come into play.
It is a shameful reflection on a Government that has been in power since 1997 that people are genuinely afraid of losing their hard earned cash stored in Banks/BS's because this type of debate is going on up and down the country and not just on HPC site.
10. Tara747 said...
sosoon - the first £35K is protected 100% (theoretically, ahem!) since last autumn.
11. str 2007 said...
Oh dear
Thank you for all the help and input to my questions.
Was rather hoping the answer was a little more concrete than that.
I am now more concerned than I was as Jack C's scenario of people withdrawing money is a realistic one.
The start of it could be just an increase in people tapping into savings to cover shortfalls.
I recall an article saying the average family had been over spending by £4-5k a year and covering it by Mortgage Equity Withdrawel.
If that facility isn't available now and the prices have gone up 15-20% then that would make a £7k annual shortfall for alot af families.
Could just a general tapping into savings start the scenario ?
12. eyeoftheweasel said...
Sosoon, regarding protection being 100% on the first £2K, 90% on the next £33K. That was the case prior to the Northern Rock debacle. My understanding is that when NR customers were given the 100% backing, the protection given to savers at other banks was changed so that it was 100% of the first £35K (nothing after that). I could be wrong though.
13. jack c said...
@str 2007
Depositor Protection - deposit taking firm - The limit is 100% of the first £35,000 per individual.
Building Societies are awash with cash (record levels) I can dig out the figures if it offers any reassurance
NR & NS&I currently offer 100% capital security (Treasury Backed)
14. jonb said...
sosoon,
The compensation levels used to be as you described, but following Northern Rock, it was increased to 100% of the first £35k. The reason was that most savers have more than £2k, and indeed if you use your ISA limit in full, you are forced to have more than £2k in an account, and that is what caused the Northern Rock run.
The protection is per FSA registration. For example, Bank of Scotland, Halifax, Intelligent Finance, St James's Place Bank and Birmingham Midshires are all part of the same Bank of Scotland registration, so you have one £35k across all of them. Sainsburys Bank, although also part of the HBOS group, has a separate registration, so you can have an additional £35k there. Royal Bank of Scotland, Natwest and Ulsterbank have separate registrations, so although part of the RBS group, you can have £35k in each of them. Virgin Money and Direct Line share their registration with Royal Bank of Scotland.
Lloyds TSB and Cheltenham & Gloucester share the same registration. Scottish Widows, as far as I'm aware, has a separate registration.
Clydesdale Bank and Yorkshire Bank share the same registration.
15. icarus said...
str2007 @10 - the MEW crowd overspending by £4-5k a year (before the rise in oil etc. prices) -- do they have savings to tap into?
16. str 2007 said...
Jack C
Are the building Societies 'awash' wish cash because people have sold houses and chosen to rent, I thought general saving was at quite a low.
I don't suppose the figures you have give an indication as to the amount of accounts/holders the savings are spread over do they ?
Does in your opinion Treasury Backing offer 100% safety and should the Northern Rock business model fail - again - due to house price falls and defaults, could the treasury cover all that is held on deposit there?
Afterall with 100% security and ok rates it's the obvious place for 'house money' during a period of renting.
17. mrmickey said...
Which ever way you look at it inflation destroys savings and for a country with very little in savings this is bad news indeed, we can only hope that our foreign friends will come and bail us out with their savings. The downside is we may have to learn chinese in the future.
18. str 2007 said...
@ icarus 14.
I know what your saying, I wonder if during the good years the temptation to increase a mortgage by 20k whilst keeping payments unchanged (as interest rates had dropped) would be just too irresistable to alot of people, whether or not they had any savings.
Psychologically it was free money.
I agree alot won't have any spare savings and I wonder how they will make up what will be an enormous shortfall over the coming year.
19. cornishman said...
@ str2007
Uncle tom put forward an idea a while back as to what may happen if the FSCS could not pay up in the event of a major problem. I believe he reckoned the BoE or the government could issue some sort of future-dated bond-type-thing which paid little or no interest. So you basically get your money back - but by the time you get it, it won't buy as much due to the increase in the RPI in the intervening years.
UT put it much more eloquently!
20. jack c said...
@15. str 2007 - (1) "Are the building Societies 'awash' wish cash because people have sold houses and chosen to rent, I thought general saving was at quite a low" - IMO the public see BS's as a safer haven - they have tighter restrictions on how they lend/raise funds compared with banks hence they have been attracting cash. If you look back at those queing at NR by age profile it gives you a clue on who holds savings !
(2) I'll dig out some figures for you later (out of office shortly)
(3) Treasury backed is as good as it gets under the present system but again IMO in the worst case scenario ie if everybody in the UK all elected to pull their cash (more or less at the same time) from the banking system then treasury backing couldnt cope. I do however think that if this happened purely in the case of NR there is sufficient backing. In your case you could consider NS&I index linked savings certs.
21. crash bandicoot said...
This was on TV the other week (as sosoon pointed out). Marlin Lewis, the money saving expert asked someone from the government this. It seemed like they had never really thought about it before. Within a couple of hours the treasury sent somebody round to assure him that it would all be covered by the govenment, but there was no need to worry because that kind of thing was never going to happen.
22. flintster1994 said...
Crash bandicoot,
"Within a couple of hours the treasury sent somebody round to assure him that it would all be covered by the govenment, but there was no need to worry because that kind of thing was never going to happen."
Don't you think that it's funny how organisations, people and governments are quite happy about making predictions based on the past and that most people are happy to blindly go along with them. However if a few others make their own predictions about how possible future events may pan out that is in contridiction to the masses, they have a go about some crank who is trying to predict the future. People like the odds to be stacked in their favour I guess. Nice and safe that way, even if what is happening in the present, does point slightly more towards a possible unexperienced before future outcome.
23. str 2007 said...
Jack C
Thanks for the advise.
I must admit I hadn't considered NS&I before but based on current RPI of 4.3% + 1% tax free and given RPI is set to rise over the next year (and house prices fall) it might not be a bad home. Also if inflation does get out of control there's nothing to say banks will pass on interest rate hikes to savers, just as they haven't passed on cuts to borrowers. Plus of course the RPI will increase.
24. jack c said...
@23. str 2007 - no problem happy to provide info to allow you to make informed choice - picking up on one of your earlier points The British Bankers Association (WWW.bba.org.uk) figures for April stated that deposits from the private sector rose by £5.8 BN (higher than both the £2.8 BN increase recorded the previous month and the £2.4 BN previous 6 month average)
The next release is 24 June so it will be interesting to see if the flight to the BS's continues - they might attract a bit from B&B (LOL)
25. crash bandicoot said...
flintster1994, I never really thought abouit it that deeply - which may be a little ironic given the point that I was trying to make!