King Calls On Banks To Pre-fund Savers' Guarantee

[Injin]

Mervyn King, Governor of the Bank of England, said today that banks should put billions of pounds into a fund over the next 10 years to compensate customers in case a bank collapses.

Speaking to the cross-party Treasury Select Committee, Mr King said that he believed the Financial Services Compensation Scheme should be at least partly pre-funded, and not rely on banks putting money into the pot after a financial institution runs into trouble.

The Governor said the lack of a 100 per cent guarantee of savers' money contributed to the run on Northern Rock last year.

Mr King also said that the Bank of England should have the power to initiate state help for failing banks. Under current proposals to reform the oversight of banks following the failure and nationalisation of Northern Rock, the BoE will only be able to make a recommendation to the Financial Services Authority that a struggling bank be salvaged.

“It’s true that I would have preferred an outcome in which either the Financial Services Authority or the Bank of England could have initiated the trigger,” he said.

“We will not have the right to initiate the trigger.”

He added that the reason that the Northern Rock crisis ran on was the lack of a special resolution regime, which meant the only alternative was to nationalise the bank.

He added that the Bank's guarantee to the troubled bank should have been offered earlier.

Mr King said that the Bank had not yet convinced everyone that pre-funding the scheme was a good idea. "We haven't convinced everyone, but it is short-sighted to say that the banks shouldn't be asked to put money in now," he said.

The scheme is currently funded by the banks, which pay an annual levy. However, it does not hold enough money to compensate savers in the event that a bank collapses.

It's vital to maintain confidence in confidence. "Special resolution regime" = stealth bailouts?

[interestrateripoff]

Won't that upset the shareholders???? Putting profit away for a rainy day just won't do.

Special resolution = giving taxpayers money to bankers to fund profits.

[kilroy]

Won't that upset the shareholders???? Putting profit away for a rainy day just won't do.

Special resolution = giving taxpayers money to bankers to fund profits.

F*** the shareholders! What about the bonuses?!?

[crash2006]

What he is saying the FSA scheme cant cover a bank failure, thats why NR was nationalised. bit worrying hey.

[OnlyMe]

He added that the reason that the Northern Rock crisis ran on was the lack of a special resolution regime

Not it wasn't.

The reason the Northern Rock crisis occurred was because the banking regulating system failed and you and the rest of the Bankrupt of England instigated a policy of low rates and cheap money regardless of the risks that were building up within the banking system.

The financial stability remit was thrown in the bin.

[Laura]

Mervyn King, Governor of the Bank of England, said today that banks should put billions of pounds into a fund over the next 10 years to compensate customers in case a bank collapses.

Is Merv saying less fraction-more reserve, but we will hang on to it for you?

Should be a very healthy picking by the time Gordo II comes to power in?????

[interestrateripoff]

Would this fund end up being taxed by the govt or even worst invested in capital projects!!!!

Banks goes bust, er sorry we spent the money on teaching men how to breast feed as we didn't want to be accused of treating men unequally. Sorry no money for savers.

[eightiesgirly]

Fancy wanting to put money away for an emergency, that's a novel concept. What a clever dude.

[Optobear]

It's vital to maintain confidence in confidence. "Special resolution regime" = stealth bailouts?

I think he is playing with fire. Most people don't understand the current scheme, they just think that their £35k is "safe". If he keeps banging on about trying to create a funded pot (like in the US), people might realise that the current scheme is an illusion, and that their £35k isn't safe at all. He must understand that risk, so, is it a cunning way of engineering the media so that when a big bank goes pop, the BoE can turn round and say - "we warned you, so we're not coming to the rescue"?

Optobear

[Injin]

I think he is playing with fire. Most people don't understand the current scheme, they just think that their £35k is "safe". If he keeps banging on about trying to create a funded pot (like in the US), people might realise that the current scheme is an illusion, and that their £35k isn't safe at all. He must understand that risk, so, is it a cunning way of engineering the media so that when a big bank goes pop, the BoE can turn round and say - "we warned you, so we're not coming to the rescue"?

Optobear

Yes, I agree with that.

he's an insider in a game that relies on people not knowing how it works. he's got to send a message to both insiders and outsiders that reassures both, when there is NO basis for that reassurance.

He's a very good central banker, is Mr. King.

Evil, vile, parasitical sociopathic scum, but with such a good face on it he's almost likable. (if you can ignore the misery and death he has caused, will cause and is causing.)

[The Masked Tulip]

What's the situation with HBOS now - I assume they got their money because the underwriting banks picked up the shares and gave HBOS the X billion they need? Or did they?

I haven't been following this too clsoely so can someone post where we are re HBOS and their perceived stability now?

Thank you,

TMT.

[Realistbear]

The idea of "fractional reserve" came about during the South Sea Bubble. Speculation and the demand for more cash than was earned set in motion a system that has, possibly until now, worked quite well. We could be seeing a couple of centuries of spending what we are not earning coming gloriously unwravelled. Not just a cyclical correction or even a depression but a structural collapse.

Gordon's bubble may have been the last breath of the "something for nothing" economics that have been practised for the last couple of centuries. Gordon took the concept to the limits which may have finally broken the idea that there is OWT for NOWT. His idea of perpetual economic motion fuelled by debt paid for by HPI was the final folly.

Merv is a realist and he did warn us that debt has a quality of reality to it whereas house prices do not. A simple, yet profound truth. I like Merv.

[eightiesgirly]

I'm not massively savvy when it comes to this banking malarky, can someone do a dummies guide to 'structural collapse' please.

Having asked for that, whatever it is, the collapse word does not make it sound like a wodge of tea and stickies for everyone.

Edited for repeated word.

Edited July 22, 2008 by eightiesgirly

[wonderpup]

I think Merv was trying to inject some risk aversion here by making sure the Banks had some stake in the safety of their depositors cash- otherwise they can play the 'privatise profit, socialise debt game all over again. Watching Merv talk to the politicians was like watching someone trying teach math to a chimpanzee- it's scary how ill informed those people are.

Edited July 22, 2008 by wonderpup

[Injin]

I'm not massively savvy when it comes to this banking malarky, can someone do a dummies guide to 'structural collapse' please.

Having asked for that, whatever it is, the collapse word does not make it sound like a wodge of tea and stickies for everyone.

Edited for repeated word.

Just imagine that at the end of this month, people don't get paid and the banks are closed.

Then go from there.

Or there is the series on Argentina to crib notes from (5 governments in 6 months, middle/upper middle classes dumpster diving for food et al.)

http://www.youtube.com/watch?v=rH6_i8zuffs

Edited July 22, 2008 by Injin

[eightiesgirly]

I think Merv was trying to inject some risk aversion here by making sure the Banks had some stake in the safety of their depositors cash- otherwise they can play the 'privatise profit, socialise debt game all over again. Watching Merv talk to the politicians was like watching someone trying teach math to a chimpanzee- it's scary how ill informed those people are.

I think they may know slightly less than I do. I honestly think that when Brown and Darling speak of a strong economy and however many quarters of growth, they really are telling the truth as they see it.

I think bits of paper with colouful graphs and happy sounding figures cross their desk and that's all the information they feel they need. It must be true because the banks say so.

It would explain why they look so bewildered when it all goes pete tong.

[Optobear]

What's the situation with HBOS now - I assume they got their money because the underwriting banks picked up the shares and gave HBOS the X billion they need? Or did they?

I haven't been following this too clsoely so can someone post where we are re HBOS and their perceived stability now?

Thank you,

TMT.

Yes, HBOS seem to have their cash (according to link posted by jack c on front page) .. thanks to the underwriters. The underwriters have been using insider information to short HBOS to retrieve the situation. Shorting is a legitimate way to hedge risk, but if they had insider info, that seems a bit fishy?

http://www.citywire.co.uk/adviser/-/news/n...8&ea=118560

HBOS aren't out of the woods though. Depends how rapidly losses start to hit from UK mortgage defaults. Looking at AmEx's figures

http://www.independent.co.uk/news/business...ing-873866.html

Amex have plenty of lending based losses, and they are not even in property!

Still think many of the UK banks will fall. I suspect the likely losses will exceed their retained capital and likely profit over the next few years. It would be better to let them fold, and let people set up new banks. Someone like Google, for example, could offer most of the services. If they teamed with some big retail chains they could offer all the services.

[Leonard Hatred]

In yesterday's local paper, I saw a small article where Leek United were proud that savings with them have shot up by £15 million in the last year, and they were also saying "we were never involved in sub-prime".

They'll get nowhere in today's business world with thinking like that!

[sikejsudjek]

They won't do that. They have the taxpayer to bail them out. Can't have the serfs calling the shots can they ?

[Optobear]

I think they may know slightly less than I do. I honestly think that when Brown and Darling speak of a strong economy and however many quarters of growth, they really are telling the truth as they see it.

I think bits of paper with colouful graphs and happy sounding figures cross their desk and that's all the information they feel they need. It must be true because the banks say so.

It would explain why they look so bewildered when it all goes pete tong.

The consecutive quarters of growth was always a strange one. Remember hearing one of them on R4 (can't remember which one), who said they had had however many quarters of growth, but if you divided by 4 you got more years than NuLab have been in power. Not surprising really, the growth started under Major, and NuLabour just continued it, and then ran the economy into the ground!