Outlook And then there was one. Only the state-backed National Savings & Investments can now promise all customers that their deposits are 100 per cent underwitten by the British Government. Northern Rock depositors, who have benefited from the same pledge during the bank's period of public ownership, will henceforth be restricted to the same £50,000 cap on compensation as savers with all other banks and building societies.
This is a necessary step as the Government moves closer to selling Rock back into the private sector – it could not do so until the advantage that the bank's sovereign guarantee gives it has been removed. And yet, this move once again shines a light on the knotty issue of deposit protection.
It is clear that Rock, NS&I and Bank of Ireland, which has enjoyed the Irish government's full backing, have won business from the security they offer to customers with more than £50,000 of savings. Equally, the row over the protection of customers of the failed Icelandic banks has highlighted the danger of savers losing out if they put their money into institutions where the terms of the lifeboat scheme are not crystal clear.
Still, the implication of the lifting of this guarantee is that the Government would not stand behind our largest savings institutions, beyond the £50,000 cap, should they fail. That is patently untrue. For all the debate about reform of banking regulation, a number of British banks remain too big to fail. Even leaving aside the taxpayer's stake in Royal Bank of Scotland, for example, can you imagine the Government allowing it to go to the wall? Barclays, HSBC and others would all be rescued should they ever need to be.
By implication, if not explicitly, the Government offers the customers of those institutions its protection. And if the big banks have state backing, so do smaller rivals. In practice, it is inconceivable that the Government would allow savers – certainly individual savers – to lose money following the collapse of a British bank.
What then, is the point in having a cap on payouts from the Financial Services Compensation Scheme? Well, as the scheme is funded, there has to be a limit on its potential liabilities – otherwise its levies on the financial services sector would be unlimited. Equally, one wouldn't want to see banking liabilities transferred on to the national accounts.
But make no mistake: we have an artificial construct. For years, savers were warned about the theoretical risks of holding too much money with one savings institution, but the danger seemed insignificantly small. As risk became reality, the Treasury quickly realised it could not allow any saver to lose their money – any more than it could should history repeat itself, at least while we have banks that remain too big to fail.Reuse content