Depositors Lose Out When Bank Fails

[Optobear]

After the fall of Indymac

http://latimesblogs.latimes.com/money_co/2...e-with-uni.html

Says that $1bn of deposits are uninsured, and savers will lose out.

Will people here begin to realise that the FSCS scheme here (which doesn't even have a pot of pre-saved bail-out money) will be even worse?

Interesting too that the US government feels that it can just leave people to suffer the loss without a central bail-out. I wonder if the UK government would be so brave? Perhaps it is to avoid setting a precedent that would bankrupt the US financial system.

[kilroy]

After the fall of Indymac

http://latimesblogs.latimes.com/money_co/2...e-with-uni.html

Says that $1bn of deposits are uninsured, and savers will lose out.

Will people here begin to realise that the FSCS scheme here (which doesn't even have a pot of pre-saved bail-out money) will be even worse?

Interesting too that the US government feels that it can just leave people to suffer the loss without a central bail-out. I wonder if the UK government would be so brave? Perhaps it is to avoid setting a precedent that would bankrupt the US financial system.

they are still paying out up to $100k limit so it's not as if they are telling people to pi$$ off entirely, (just those dumb enough to have more than $100k in their accounts are getting screwed for the difference)

[Optobear]

they are still paying out up to $100k limit so it's not as if they are telling people to pi$$ off entirely, (just those dumb enough to have more than $100k in their accounts are getting screwed for the difference)

Right they are sticking to letter of the law (as it were),

The FDIC protects you against the loss of your deposits if an FDIC-insured bank or savings association fails. FDIC insurance is backed by the full faith and credit of the United States government.

and

The basic insurance amount is $100,000 per depositor per insured bank. Certain retirement accounts, such as Individual Retirement Accounts, are insured up to $250,000 per depositor per insured bank.

If you and your family have $100,000 or less in all of your deposit accounts at the same insured bank, you do not need to worry about your insurance coverage -- your deposits are fully insured.

While the FSCS says

We can pay compensation if a firm is unable, or likely to be unable, to pay claims against it. This will generally be because it has stopped trading and has insufficient assets to meet claims, or is in insolvency. We describe this as being in default

and

The maximum levels of compensation are:

Deposits: £35,000 per person (for claims against firms declared in default from 1 October 2007).

100% of the first £35,000.*

Note: for deposit claims against firms declared in default before 1 October 2007, the maximum level of compensation is £31,700 (100% of £2,000 and 90% of the next £33,000).

Note the difference in language. Particularly the words "Can pay compensation" and "maximum levels" for the FSCS. Contrast with "protects you", and "full faith and credit of the United States Government"

"Can" means "is allowed to"

"maximum" means "no more than"

Much less definite, and there are good reasonsfor that:

i) The FSCS hasn't got any money saved up to pay-out,

ii) it has a maximum pay-ouy pot size of £4bn (which is laughably small compared to a large bank), and

iii) is a levy on an industry which is so bankrupt that they've had to have humiliating rights issues to stay in business.

So, in the event of a major bank failure, if the UK stuck to the letter of the law (in the same was the US government has been doing) then you are entitled to .... precisely nothing. You may get slightly more than nothing, but the law says your entitlement is nothing.

Worth thinking about?

edited for clarity

Edited July 28, 2008 by Optobear

[VeryMeanReversion]

In the US, Freddie and Fannie are taking the big hit but will be bailed out by the US treasury. The banks passed on much of the risk.

In the UK, the losses end up on the banks (and those that bought the MBS's)

The bubble was more extreme in the UK. Figure out the consequeunces.........

I've been moving my STR funds into Northern Rock but still have some bonds elsewhere that complete in September. It will all be in the Northern Rock the day after.

The wording for the Northern Rock guarantee is much better than the FSCS. It's 100% govt covered, max is £250K per person in their eSaver 6%.

VMR

[Optobear]

After the fall of Indymac

http://latimesblogs.latimes.com/money_co/2...e-with-uni.html

Says that $1bn of deposits are uninsured, and savers will lose out.

Will people here begin to realise that the FSCS scheme here (which doesn't even have a pot of pre-saved bail-out money) will be even worse?

Interesting too that the US government feels that it can just leave people to suffer the loss without a central bail-out. I wonder if the UK government would be so brave? Perhaps it is to avoid setting a precedent that would bankrupt the US financial system.

Seems that there is a way around the FDIC rules

http://www.marketwatch.com/news/story/enjo...D&dist=hppr

The approach seems to be split deposits among many banks in chunks that are below $100k.

The same could be tried here, you take your cash along to one bank, and they split your deposit with 10 other institutions thus guaranteeing 10 lots of £35k.

Would it work? Of course not, there is no money in our pot, and so our scheme can't work.