This week, Chancellor Alistair Darling said he wanted to do both when he announced plans for a shake-up of the scheme that protects us when (or should that be if?) our banks get into a Northern Ruck. But, you can’t help wondering whether the appearance of another hole or two is just around the corner.
To be fair, there is some comfort in the Government’s plans. Moves to increase the amount of money protected from £35,000 to £50,000 and ensure savers get at least some of their money within a week will help to calm the nerves for instance.
But the rest of the package, largely made up of measures to keep a closer eye on banks and step in earlier should they run into trouble, conjures images of a psychotic horse rampaging through the money markets, whilst several miles away a man in a grey suit quietly closes a barn door.
The Northern Rock crisis shouldn’t have come as a surprise to anyone in Government but this package smacks of a Government protesting "We couldn’t see it coming, we didn’t have the powers in place to do so".
Northern Rock showed outward signs of health in the form of an increased market share and almost £300m in profits in June 2007. But it was by far the most reliant on the money markets to finance lending (61% came from the money markets – the closest any of its rivals came to that kind of exposure was HBOS at 33%).
On the 4th of September 2007 the LIBOR (or the rate at which banks lend to each other) reached its highest level for nine years and all that borrowing seemed a lot less sensible. Ten days later, the rout had begun in earnest. Meanwhile, the Bank of England had been alerted to possible problems at the Rock in August…
Anyway, I’m not a Northern Rock shareholder, so there’s no point crying over spilt milk.
Back to the good news and the increased protection that we will all enjoy under a revamped Financial Services Compensation Scheme. In essence the scheme allows banks to borrow money from the public sector in order to compensate savers, should the bank run out of money.
But hold on, public sector you say? Isn’t that just a euphemism for taxpayers’ money? So we allow the banks to ‘look after’ our money and, if they lose it, we get to give them the money to pay us back? Maybe I’m missing something…
Of course, this whole situation should give anyone lucky enough to have more than £50,000 to squirrel away in savings pause for thought.
My first reaction would be to make sure that I don’t have more than £50,000 sitting in any one savings account – anything else would be silly, surely? However, that could lead to A LOT of money being moved around come September (when the new measures should come into effect). What effect will that have on banks already struggling to raise cash reserves?
Ultimately, this package of measures is supposed to shore up our confidence in the banking sector and stop us all from going back to keeping our money under the mattress.
Well, it might give us more confidence that we’ll get our money back, but that is not the same as confidence in the banks themselves. Quite the opposite in fact. The fact that the banks resisted moves to pre-fund the compensation scheme because it would harm their attempts to raise capital tells its own story...
