Questions the Government faces over banking guarantees

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The Independent Online

The Government is facing increased pressure to follow its European counterparts in pledging 100 per cent protection for UK savers.









What has the German government pledged?



Chancellor Angela Merkel vowed that the federal government would guarantee all private savings accounts in German banks. Finance minister Peer Steinbrueck said that from today German citizens need not worry about "a single euro of their deposits" during the global financial crisis.





Is Germany the only country to offer such a promise?



No. Last week Ireland said all money held in savings accounts at six institutions - Allied Irish Banks, Bank of Ireland, Anglo-Irish Bank, Irish Life and Permanent, Irish Nationwide Building Society and the Educational Building Society - will be guaranteed in their entirety.



Greece has likewise guaranteed its depositors' savings.





What is the situation in the UK?



In the UK, savings of £50,000 are covered under the Financial Services Compensation Scheme (FSCS). The limit relates to deposits with an organisation, regardless of how many accounts the customer holds. The limit had, until recently, been set at £35,000 but as a result of the current crisis, ministers agreed to up the ceiling.





Can UK citizens benefit from the announcements in other countries?



Yes. Three Irish banks - Allied Irish Bank, Anglo Irish Bank and Bank of Ireland - have branches in the UK. These will be covered by the Irish Government's guarantee and British citizens can open accounts with relative ease at branches in the UK. In addition, the Post Office's savings products are run by Bank of Ireland, giving customers 100% protection.



There is also nothing stopping UK customers opening up an account with a bank branch in Ireland. Although it may be harder, as many will want you to appear in person to open the account.





How have British banks responded? Aren't they at a disadvantage?



On Wednesday the British Bankers' Association (BBA) challenged the Irish government, claiming that the guarantee was anti-competitive, especially for banks in Northern Ireland. It fears that UK savers will move their money to Irish banks in a bid to benefit from the guarantee offered.





But don't some institutions in the UK already offer 100 per cent protection?



Yes. When Northern Rock collapsed, the UK Government made an exception to end the run on the bank, ensuring that all of the Rock's savers will have deposits covered in their entirety.



National Savings & Investment, which is backed by the Treasury, also offers complete protection on people saving through its products.



And Bradford & Bingley savings are safe while part of the collapsed bank goes through the process of being transferred to Santander, owners of Abbey.





So, if ministers pledged complete protection for Northern Rock and Bradford & Bingley, what's to say they won't do the same if another bank fails?



Nothing. The whole question in many experts' view is purely theoretical. It would, it is argued, be almost inconceivable for the Government to let savers lose their money as a result of a bank failing.



Unlike more risky investments, people are not given explicit warnings that they could lose their savings - the whole stability of the banking system depends on the belief that money is safe in the bank.



If people started to lose money, it would lead to instability on a grand scale and a return to a run on the banks as panicked savers attempt to move cash out.





So why don't the Government just follow the German and Irish lead and guarantee all savings?



Because it shifts liability from the banks to the taxpayers. And we are talking about a lot of money. Estimates suggest it would mean a risk running into the trillions of pounds - that is £1,000,000,000,000s. This would place a huge burden on public finances.



And it could be the "thin end of the wedge", some fear. Bank's business customers may be next in asking for their money to be covered.



An 100 per cent guarantee could also impact on the Government's ability to raise funds which in turn could hit public spending. The theory has it that with a promise to protect all savings, people would be less willing to buy into secure state-backed bonds.



The main attraction of Government "gilt-edged" bonds is that they are seen as one of the safest places you can put money.



If bank saving accounts are covered by a Government guarantee this will no longer be the case. As such they would be deemed to be less attractive, especially as they currently offer a return which is less than that of a top savings account.

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