Savers shouldn’t be rewarded for chasing risky Icelandic rewards
What on earth were people thinking of when they put their savings in an Icelandic bank? What on earth is the chancellor doing baling-out those savers?
Moral hazard has gone out of the window in rescuing these savers. The lesson is that the public can carry on chasing high returns with no concern for the risks.
You don’t need to know much about Icelandic banking to realise the risk in putting money there. It is the fact that so few of us know anything about Icelandic banking that should have rung the warning bells.
If these savers did know anything they would have realised Iceland’s banks had turned to the UK to raise money because they had exhausted the country’s own tiny population. They could have seen that the scale of investment by these banks dwarfed Iceland’s economy. They should have spotted that the country’s compensation scheme is inferior to Britain’s.
And if they’d added together those factors they might have guessed that the country could not afford compensation on that scale anyway, and would renege on it, as it has.
The local authorities who put their (our) money in these banks have even less excuse. Most were investing in a country with a population smaller than their own council areas.
A chancellor who is worried about UK savings going abroad to countries offering more attractive compensation schemes should have used the Icelandic banks’ collapse as a reminder of the danger of investing in the unknown. Instead, by guaranteeing the funds, he has encouraged the outflow to continue, so adding to the problems of UK banks. Problems that the chancellor has to solve.
Baling-out reckless savers in foreign banks is a misuse of UK taxpayers’ money. He should not extend his error by acceding to the councils’ demands to be compensated for their losses. Transferring public money from central government to local government would be madness.
As for the regulators at the Financial Services Authority, if they cannot stop banks outside its jurisdiction from operating through branches in the UK, it should at least require them to hold such high reserves in Britain that the banks go elsewhere.
October 9th, 2008 at 11:07 am
What rot - people invested in Icesave with their eyes open: it was covered by the FSCS via the passport protection scheme, so as well protected as the UK banks. So get your facts straight! The only thing I do find dubious is the commitment to bail out those with > £50K savings in Icesave. Those people are clearly not the shapest tools in the box…
October 9th, 2008 at 11:13 am
As an Icesave customer, albeit with only a modest proportion of my savings in Icesave, I am profoundly relieved by the bailout. I do agree with the last sentence of your article, to the effect that foreign banks accepting retail deposits in the UK should be required to hold very high reserves here.
But what about the Post Office Savings accounts? They are underwritten by the Bank of Ireland. If this failed and the Irish Government reneged on its promises to underwrite depositors losses, who is responsible for the moral hazard? We know Irish banks are having a tough time and that Ireland is overbanked, albeit not to the scale of Iceland.
If the chancellor had not underwritten Icesave accounts, might there be a run on the Post Office accounts? The hard line advocated in the article might encourage just such a run. Would you be relaxed about that? What effect would that have on confidence in British banks?
October 9th, 2008 at 11:23 am
I think you’ll find Icesave was an FSA regulated entity and a UK company whose rates were not excessive, just competitive. Indeed there is a strong argument that its rates helped stoke competition in the traditionally weak savings market in the UK and therefore benefitted far more people than its depositors themselves. As for the unfortunate depositors - you would do well to remember that these people did not buy shares in a foreign entity. They did not invest. They merely deposited their money in a bank that actually had sounder fundamentals and practices than many UK institutions. There was a lack of clarity that depositors needed to bank where the state could meet its guarantee (how would they know?) and a lack of regulation that allowed a weak guarantee to market here. That is the issue here. And that is the fault of the FSA.
Additionally if the icesave accounts were so risky, why were they championed by so many institutions? Did you blog about pulling out of iceland as soon as possible?
And somehow you also call these depositors “rewarded”. They will be lucky to get their cash - without interest - in time for christmas. Where is their reward?
There were many other valid criticims of the government’s actions, for instance the short and medium term consequences to the tax-payer of offering such a guarantee. But calling the depositors “rewarded” for “chasing risky rewards” is non-sensicle and reeks of jealous attention-grabbing. Please grow a brain before you put fingers to keyboard again.
October 9th, 2008 at 12:12 pm
Icesave customers were saving with a branch of the Icelandic bank, not with a UK entity.
The account paid a higher rate of interest than almost all other banks operating in the UK (including other foreign banks).
Savers have benefited from those high rates and are now receiving repayment of their capital in full, giving them the upside of the high reward without suffering from the downside of the collapse.
October 9th, 2008 at 1:13 pm
Well the Icelandic branch was a UK entity. Should Abbey customers be worried about its Santander owner? Icesave was UK registered under number FC26112 and registered address of Beaufort House, 15 St Botolph Street, London, EC3A 7QR. Oh, and it was also authorised by the UK Financial Services Authority and regulated by the FSA for its conduct in UK business. And its deposits guaranteed under the passport system sanctioned by…the FSA! All very UK so far…
As for its rates, Icesave topped at 7% for a 1yr savings bond, Current Halifax 1yr savings bond….7% Well look at that!! Even after the rate cut. Are their savers greedy also? Is it too high for them to be entitled to the guarantee?
Savings rates are not risk/reward investments. It is a long established prinicple of global and UK banking that retail customers deposit their cash to protect against theft and inflation and save for retirement/housing etc. Banks compete to be the ones to hold these funds by offering a variety of savings rates. This competition benefits the entire population.
These deposits are also guaranteed to secure bank liquidity and avoid “runs” on the bank in times of financial crisis. Just like the Icesave ones were.
So the Icesaver’s “reward”, as you put it, is a privilege common to EVERY SAVER IN THE UK. If you had tailored your article to the over 50k savers you may have retained a modicum of relevance - but instead you simply went after people for not knowing the Iceland FSA sanctioned “passport” guarantees would not be worth the paper they are printed on.
How very astute of you. Do you really expect the general public to be aware of this when their is no corroborating advice from the FSA/government or leading commentators who helped promote these savings schemes? I’d be delighted to read your past advice to this effect.
However I’m afraid respect for your work is still pending.