In a desperate attempt to prevent withdrawals of deposits from banks suspected of being at risk, European governments have hiked the amount of protection they offer. Ireland is so far the only one to offer unlimited state backing for 100% of all deposits, but others are under pressure to follow suit.
The truth, though, is that over 95% of all depositors with UK banks will be unaffected even if the government does offer a 100% guarantee. This is because over 95% of savers have less than £50,000 on deposit, the amount that is fully guaranteed under the existing compensation arrangements. But as we saw with the run on Northern Rock, it is not savers with a few hundred or thousand pounds on deposit who cause runs on banks: it is fat cats with hundreds of thousands. It was those fat cats withdrawing their cash from Northern Rock that precipitated the wider run that caused its failure. And they could do the same to pretty much any of the European banks, all of which have large deposit bases.
Amazingly, 45% of the value of all UK deposits is held by just 4% of savers, and these 4% have very big sums on deposit. Of course they would like to have a full guarantee for all their savings and would like not to have to parcel it out into £50,000 chunks in different accounts to get protection, but why should a country’s banking industry be run for the benefit of 4% of its savers? It’s crazy for politicians to offer such guarantees, especially against the wishes of the very people who regulate their banking systems.
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National Savings cuts rates again
Actually, the fat cats are crazy too. Look at National Savings, which cut its rates again this week because it was taking in tidal waves of money from worried savers. Yes, you do get an unconditional, 100% guarantee over ALL your money with National Savings, because it is a department of the Treasury. But is it worth sacrificing 1% or 2% interest to get this guarantee? National Savings rates are now so poor that almost anyone would do better to move their money elsewhere. For the fat cats, parking your money in National Savings may make sense (hello, Alan Sugar!) but for ordinary savers it offers a poor deal and if your total savings are under £50,000 you also get a 100% guarantee from other UK banks.
Also, just look at what the lemming-like behaviour of the scaredy-fat cats is producing: a shrinkage of accounts. Northern Rock, now also 100% safe because it’s owned by the government, has had to cut its rates to slow down the inflow of deposits. With Alliance & Leicester and Bradford & Bingley now owned by Santander, it won’t be long before their accounts are slimmed and their interest rates trimmed.
Some consolidation in the banking sector was overdue and with Santander (Abbey, A&L, B&B) accounting for about 10% of the market and the proposed Lloyds TSB/HBOS about 30%, the UK will have a more concentrated banking sector than most European countries. The banks will argue that they need the capital and the scale of operations; the regulators will agree, because having a few big banks for them to regulate makes their life easier.
But the concentration won’t do you or me as customers any good at all, despite the banks’ PR blather to the contrary. We don’t expect real innovations and better value services from banks, but we know where to go. Tesco’s decision to launch a full range of banking and mortgage services is about the only piece of good news in a dismal week.
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