Tuesday, August 4, 2009

Compensating the depositors……

FSCS levies for deposit-taker defaults: implications for firms – Update

How much? Whats a billion here and a billion there anyway? "He took it to the levy but the levy was dry". - the FSCS borrows the money to pay the depositors who lost . They also paid santander for B&Bs losses (unless i have missed something) - 15Bn for that one. The FSA collects the money - after the FSCS has worked out what it is. "Levy invoices will be issued by the FSA on behalf of the FSCS to firms before the end of July 2009 for payment on 1 September 2009." How much would that have been if the banks were allowed to fail? And how would that have been funded..... Answers on a postcard, or by comments to this thread.

Posted by techieman @ 08:23 AM (1041 views)
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19 thoughts on “Compensating the depositors……

  • Not completely sure I’ve completely understood – the FSA is paying money to the parent companies that have taken over failed banks from the FSCS?

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  • I don’t think I’m getting your point here techieman.

    My understanding is that so far, the FSCS has borrowed £18.2bn so far to pay for compensation in respect of failed banks and the first interest bill of £390mn is soon due so that will be split up between the deposit taking institutions. In the future, levies must rise to pay off the loan but that is unavoidable. The remaining deposit taking institutions are doubtless unhappy about this (especially the building societies who argue that they took less risks) but what was the alternative – a massive run on the retail banks.

    “How much would that have been if the banks were allowed to fail? And how would that have been funded”

    Well the report appears to imply it would have been about £15.8bn – the lion’s share of which would have been for B&B. What I’m not sure about is the meaning of the phrase “deemed compensation” to Abbey (compensation for a bad loan book?) Personally, I accept that this bailout had to happen although it seems a pity that B&B coudn’t have been kept in UK ownership.

    By compensating all depositors, the banks have taken on an estimated extra liability of about £2.4bn but the alternative would have left our banking system in tatters.

    In an ideal world, there would be a lot less protection so that depositors are encouraged to think about risks but that is for the future.

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  • Quiet Guy – you have hit a couple of points I was trying to make on the head.

    First though let me explain what I think has happened here. B&B went into effective administration. Rather than the government taking it over a la Northern Rock, it was in effect transferred to Abbey Santander.

    Stantander though are not going to accept the new depositors (and their deposits) without being paid an amount commensurate with those deposits. Hence the payment by the FSCS of the 15Bn.

    Paul does that explain it? The FSA are charging the levy to their own “members” for the losses incurred through the Financial Services Compensation Scheme. FSCS calculates the losses, tells the FSA and the FSA calculates the allocation to its “members”.

    My point was if we had let the other banks go under – e.g. HBOS , then who would have been left to pay the guaranteed deposits. Lots of people on here have advocated we let the banks go under – so my question was to them.

    As you say if there was no deposit “insurance” then the deposirtors may have been more diligent re where they put their money, for example they may not have invested with B&B when ME was being so aggressive with its borrowing. The only thing I would say about that is its not for the future, it should have been done in the past. But going forward its unlikely to happen.

    As you say the remaining deposit takers would be pi55ed off because not only, as you point out, will they be funding the failed companies IRO the deposits made to them, but they would have lost those deposits because the “less safe” institutions would have been offering better IRs. Thats what happened in the S&L crisis in the late 80s.

    You might be interested to read the thread I posted on Sunday re this point, where Devo and myself discussed it.

    http://www.housepricecrash.co.uk/newsblog/2009/08/blog-could-this-have-been-said-at-the-mansion-house-24637.php

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  • This from yesterdays Citywire:-

    FSCS: all levy groups may have to pay towards £21bn bank bailout bill
    By Iain Martin | 13:21:00 | 03 August 2009

    Financial advisers may have to pick up part of a £21 billion Financial Services Compensation Scheme (FSCS) tab for bank failure payouts.

    The cost of bailing out consumers in large institutions, including Icesave and Bradford & Bingley, was meant to fall on deposit-taking institutions, but the FSCS has now warned all that levy payers may have to pay.

    The FSCS borrowed money from the Bank of England and the Treasury to compensate consumers quickly, but it is now unclear who will repay the outstanding loan after initial repayments are completed in 2012.

    ‘Until the repayment timetable is agreed in 2012, it is not possible to say what levy class or classes will be levied for any outstanding principal,’ said Loretta Minghella (pictured), FSCS chief executive, in its annual report.

    ‘We recognise the challenges for levy payers in dealing with this uncertainty, and plan to work closely with HM Treasury with a view to giving levy payers as much notice as possible about the likely impact on future levies.’

    Minghella, who was paid £279,493 last year, noted levy payers’ concerns about the compensation scheme and supported the proposals for pre-funding the FSCS set out in the Banking Act 2009.

    The Nationwide Building Society has led a campaign to make high-risk firms pay a greater share of the levy.

    The headcount at the FSCS has fallen to 173 from 191 last year, but the cost of running the compensation scheme, including interest on the government loans, has exploded to £479.6 million from £25.4 million in 2008.
    The FSCS declared 119 firms in default this year, including major institutions such as Bradford & Bingley. Excluding the defaulting banks – mortgage endowments generated the most claims, accounting for 3,800 of the 11,000 total – the typical payout for a mortgage endowment claim was £2,290.

    Failed stockbroker Pacific Continental Securities was responsible for the second-largest number of claims at 2,400.

    Compensation claims for investment advice and products fell by 30% for the year 2008/09 to 9,300 cases, down from 13,275. The average compensation payout for an investment claim was £14,200.

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  • Jack – I can feel some lawyers starting to rub their hands!

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  • techieman – agree with your last point regarding the lawyers – there will be a few big winners from this mess.

    Here is my rather simplistic understanding (and I stand to be corrected on this) – the FSCS was set up as a safety net to protect consumers in the event that a company cannot meet it’s obligations – for example a small IFA firm that has a run of say pension transfer complaints and cant then meet the compensation requirements from its own resources – the onus would ultimately fall on the FSCS.

    The main point on this/the above (and this was highlighted by several contributors on this site at the height of the banking crisis) is that the FSCS cant really cope with large scale institutions that cant meet their obligations – hence they have been forced to borrow the money which ultimately has to be repaid – tie this in at this same time as the FSA being forced to borrow £200m and a large can of worms is now opening up with this one.

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  • Jack – i think your IDEA of the FSCS was right but it was always SUPPOSED to compensate for a banking failure BUT they probably never envisaged that. Reactive government etc.

    Re the £200m – i think the FSA will merely increase the fees it charges to the authorised firms. But this will probably be dealt with in their business plan. I think them borrowing the £200m is a bit of a red herring, but that really to make sure there was no conflict of interest they should – like the FSCS have a credit line to the Government – whoops more Gilt sales for the gov to repurchase with made up money!

    The FSCS is funded by a levy. For example the demise of the Independant Ins Co previously. They will just have to apply that levy – the FSCS has no money of its own. Although its reponsible to the depositors it gets its money beck by charging the FSA “members”.

    At the moment this looks like a fudge since they dont know exactly whose gonna pay the total amount borrowed. The problem as i see it – is if the contributors accept payment of their share of the interest then wont that mean they have a precedented share of the loan amount itself?

    In any case young Mr Osbourne will no doubt sort this out by abolishing the FSA when the conservatives come to power – or more likely breaking it up and calling bits of it something else and having the BoE running it – i..e. in essence business as usual!

    Watch this space!

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  • techieman – agree that they never envisaged companies of the size of B&B etc.. being forced into falling back on the FSCS and in any event they could not (IMO) have pre-funded this anyway.

    The fees charged by the FSA and the increased levy proposed by FSCS is strangling a lot of small firms – we carrently have a saying up North in relation to IFA businesses “would the last man standing please turn out the lights” – the whole thing is playing right into the hands of the big banks and I cant see Dave or George sorting this out when they romp to power.

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  • yea my comment about Georgie boy was tongue in cheek! Hope you don’t have to resort to candles Jack!

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  • stillthinking says:

    The banks should certainly have been left to fail.

    If you take the view that the banks got into trouble because the UK economy overall was incapable of servicing debts, then whether the UK economy has the abstraction of government taxation as a payment method, or whether the UK economy has the abstraction of increased bank charges due to liabilities to the FSCS, then how can this change the inability of the UK economy to cover the debt?
    The only way it seems to me would be if the UK net economy is actually truly capable of covering the debts. In which case of necessity some in the UK are covering debt but without a corresponding change of ownership of assets. That isn’t an issue of fairness, that is organised theft pure and simple. Or to put it a different way, the defaults effectively still occur, we just move their location.
    I also don’t see how British banks can compete against foreign banks if there is a tariff applied only to the UK banks, which must come from either a lower saving rate or a higher interest rate on debt. Slowly people will find it more profitable to both take loans out and save in a bank which isn’t liable, i.e. a foreign bank. For example, are Santander and Bank of China, and Tesco if they ever get going, going to be subject to this punitive tariff from costs run up before they were even established in the UK?
    If you were going to set up a shoe company in the UK, and you were told that you would have to make payments in proportion to your share of the UK shoe market, to pay for every shoe company that had gone bust in the past, I don’t think you would open that company up here.

    My main point, is that it is not clear whether rescuing the banks was actually possible, so discussing the merits of rescuing them is a bit beside the point. Consider Japan, they “rescued” the banks nearly twenty years ago, now their government is hopelessly in debt and facing the impossible task of returning 200% of GDP back to the population, in which case Japan did -not- manage to rescue the banks, they just shafted their own country for over two decades before ultimately defaulting. If as looks likely the UK won’t be able to truly rescue the banks then what on earth are we doing?

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  • quiet guy said, “In an ideal world, there would be a lot less protection so that depositors are encouraged to think about risks but that is for the future.”

    Get rid of this implicit protection and watch the insurance companies fight over each over to get the business, it will end up being cheaper for the saver and there will be more choice over risk level in the savings market.

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  • ST – a couple of points. If you are a foreign owned bank it makes no odds. You are still regulated by the FSA in this country as its where you are doing the business thats the issue. So if you want to play here you have to play by the rules here. [unless of course you are French :-)]

    Letting the banks all fail in one go – would have been a catastrophe not just because of the FSCS, but because of contagion, bank runs etc. However i agree with the Zombie bank issue you put forward, and the expansion of GDP not being comensurate with the expansion in macro debt levels. But what to do?

    1. Rescue the system (which means im afraid individual banks)
    2. If necessary support the banks – with public funds eg government investment / shareholdings.
    3. Divest those shareholdings as quickly as possible – although a bit more on that below.
    4. Ensure bank stability is a higher priority then “starting to lend again”.

    I agree the banks have created a rod for their own back but forcing them to lend on – at best marginal projects wont work. Now once divested if the bank then gets into more trouble then should we save them again? Probably No – which paradoxically means we cant effect 3. for quite some time.

    “what on earth are we doing?” – we are rolling the dice and buying time. This is a tightrope we are walking on – personally and i some stage i think we fall off, but when and where that is,… thats the trillion $ question.

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  • stillthinking makes some good points on this topic and my thoughts in relation to the last sentence/? is that the efforts made in relation to the banking crisis is akin to re-arranging the deckchairs on the Titanic – time will tell.

    techieman – we could get a song out of this thread – “He took it to the levy but the levy was dry”, Jack, candlesticks etc… – I’ll get my guitar – I’ll play it and you can sing it (you know the one i’m on about?)

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  • bidin'matime says:

    Re IFAs – as a chartered accountant I was also an IFA but regulated by the Institute (ICAEW) up to 2001, when the FSA took over – we went from paying about £20/yr compensation (not too many chartered accountants doing a runner..) to hundreds then thousands. The fees went from a few hundred a year to thousands and the handbook went from about 4cm thick (printed on A4) to, well, who knows – I shudder to think how big it would be if you printed it all out now.

    So last year I got out – not a moment too soon, either, as it seems from the letter that they will be charging exit fees next!

    As jack-c says – “would the last man standing please turn out the lights”

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  • stillthinking says:

    I don’t see that bank runs were not preventable. Surely the easy way to resolve the crisis would have been to move all the funds available in non-current accounts to bank capital, debt for equity. The immediate crisis would have been over, and this move when possible could have been undone to whatever extent possible.
    At the moment we are experiencing a slow exodus from the UK, now itself a bank, first the foreign gilt holders leave, and then savers will seek to move funds abroad, because abroad suddenly has less risk and potentially higher returns. This is what happened to the Japanese savers, they moved funds abroad -but- these were immediately recirculated back thanks to buoyant demand for Japanese goods. I don’t see that UK capital will be circulated back in the same way. Although people are looking at 4% interest rates on savings in the UK there has been a 20%~ fall in the value of the pound, savers will eventually wake up to their loss. At some point this is bound to be noticeable. Frankly I am staggered that the pound can lose so much value with so little effect on UK prices.
    So the choice seems to have been an orderly acceptance of bank losses, or the risk of a currency crisis. I think a currency crisis will be a lot worse. Further, it seems to me that if there isn’t going to be a currency crisis in the future, then the only basis for that would be that the banks were in fact fundamentally sound all along. But they are not.
    We have just seen Iceland successfully carry out much more draconian measures, so we did have the choice. What we have chosen in essence is to move bank debt away from the beneficiaries of excess bank lending, and onto the taxpayer as a whole. But we have seen in Japan that this did not work.
    Buying time in this case is hoping for a miracle that won’t come.

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  • @bidin’matime – in response to your point “I shudder to think how big it would be if you printed it all out now” – I’m led to believe it is equivalent (seriously) to reading the bible 4 times over ! and yes it looks like “run off” insurance cover is another cost to add to the business overheads. I cant say I blame you for getting out.

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  • ST “I don’t see that bank runs were not preventable. ” The fact is its opinion – we will never know if at the time you or i would have been proved right. Personally i think people would have been skeptical, and as wqe know banking is all about confidence.

    Maybe we will find out for sure IF there is a next time… in the not too distant future. The reason the “pound can lose so much value with so little effect on UK prices”. Is because of the deflation.

    Currently we are in the twilight zone.

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  • This is shocking!

    Never really understood why the FSCS should have anything other than first claim on all the banks’ assets – e.g. in the event of failure, before bondholders and certainly before shareholders, the claim that the FSCS should have on the banks’ assets to compensate depositors must be funded to 100% of its value (as determined by sale to, e.g. Santander) before any other creditors get a look in. OF course, there is still risk that there is a shortfall and the taxpayer would get exposed, but really, no bank bondholder should be anywhere near the top of the pile or on equal footing when it comes to claims on failed banks, when there are depositors to refund. Depositors, via the FSCS, should be no.1 – why should the taxpayer shoulder any greater risk than that?

    Having said that, much of the bonds were held by other banks, so the risk was systemic, but here I have to agree with stillthinking – the banks should have failed. They should have failed, the depositors refunded through FSCS via selloffs to sensible other banks, and the taxpayer would have been much less burdened to make up the shortfalls. Bondholder wipeout. And going forward, the sovereign debt we would have had to take on would be lower, and there would be no zombie banks with taxpayer debt to pay back, so there would not be encumbrance on future bank depositors, debtors and taxpayers to repay the sovereign debt and deposit insurance through higher taxes and banking fees.

    This recovery will be very anaemic, and we are not out of the woods on sovereign default, due to the mistakes this awful government and its City “friends” made. Britain could have become the safest place in the world to deposit (in future banks) had the big names been allowed to succumb, now the costs of deposit insurance are being wrongly dumped on depositors and taxpayers (indirectly) when they should have fallen on stupid lenders and equity holders. No lessons were learnt, other than that the taxpayer is a sop for bailing out failed banks – I look forward to seeing the political parties’ manifestos’ “Saving bankrupt banks with higher taxes” – a sure vote winner.

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