Protect savers’ capital but not their high interest
Why are prudent savers compensating those who took risks? The new Banking Bill should not guarantee the ridiculous interest rates offering by dodgy banks.
The compensation limit for savers in failed banks was raised to £50,000 per account during the panic following the run on Northern Rock but that includes interest as well as capital. So if a bank offers an unsustainable 10 per cent to attract deposits and then collapses, a customer who invested £45,000 for a year gets back not only all his capital but all the unaffordable interest too.
There is thus no incentive at all for the depositor to exercise his own prudence by choosing a safer bank that pays less.
Yet who pays that compensation? The safe banks that lost business to the rival paying high-interest rates. Ultimately therefore, it is the prudent customer who bails out the risk-takers.
The previous compensation regime – when the limit was £35,000 - left customers to bear part of the loss, though it did not differentiate between capital and interest. That nevertheless encouraged savers to look at more than the interest rate on offer.
Fully bailing-out customers in the Icelandic banks sent completely the wrong message however. And ironically, the collapse of the pound against the euro means that foreign bank accounts now offer a £90,000 compensation ceiling that is better than the UK regime. The Dutch ING has thus withdrawn from the UK compensation scheme because it offers better terms to customers as well as exempting ING from contributing to other banks’ failures: even the UK Post Office, whose accounts are managed by Bank of Ireland, has opted out of the UK government scheme.
In its haste to restore confidence to UK banking the government has produced a compensation regime that removes the risk from ridiculously high reward. Before the Banking Act becomes law, the compensation scheme should be changed to repay all capital but not to guarantee the unreal interest accumulated.
Perhaps a nominal rate related to bank rate could be permitted, but for savers who have seen their bank collapse, merely recovering their capital ought to be sufficient satisfaction. There is no reason why prudent savers – corporate or individual - receiving negligible interest rates should finance the reckless and greedy.
January 25th, 2009 at 11:17 am
In reply to the above article…
Reduced Interest Rates
I am a retired person in England who regards my money (’savings’) as my private pension fund. When my wife and I had a mortgage the rate was always in double figures and we made sure that we could afford it; now my fund’s interest is falling to zero. This is not a good enough return and I have been looking around the world, via the internet, for a better investment. Brazil for example, or France, to take advantage of the future further falls of the pound against the Euro. I certainly no longer trust the pound. For example, any one with £100,000 in Euros would have seen an increase of value to around £140000 over the last twelve months.
I do not understand why the interest has been reduced, it can only lead to a loss of capital to Britain and a consequence of a slump, as happened in the last century. The pound has already followed the dollar down to a drastic revaluation that must lead to seriously increased inflation.
Is this all being done to delay the bankruptcy of badly managed banks and a minority of property developers/dealers and stupid mortgage holders who have over-borrowed; and maintain the unrealistically high property prices? I would have thought that it would be better to get the bankruptcies done to get rid of the incompetent, and place their business in more competent institutions and cleverer people.
The removal of the incompetent banks and the drastic reduction of property prices to affordable levels would be a much securer long term solution. We have had a very long period of continued inflation, it is time for a period of deflation to balance things up and bring about a stable value of our money for future generations. It is grossly irresponsible to allow the continuous inflation of prices that erodes and devalues the value of every one’s money and gives future generations very little to build on.
As a person who owns the money I am not satisfied with any interest below 5% pa, and if the interest is not returned rapidly I will take it to where it is more valued, and respected; which will not be the stock market, but rather abroad, or property when it falls far enough. Then the UK lenders will not be able to offer cheap loans because they will not have the money to do so.
If things continue as they are now, then the UK’s financial institutions and people’s personal savings are going to be nationalized, as were the coal mines, the railways, the car manufacturers, the steel industry, and the defence industry, and where are they now?