Leading article: A promise to bank on?

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The Independent Online

Welcome to the Alistair Darling Instant Access account. Well, almost instant. Under the terms of the proposed new Government-backed scheme to protect depositors in failing banks, investors can be sure that they will get their money back. Well, sort of sure. You have to read the small print.

The "lead option" for a limit to compensation per depositor is a figure of £50,000, up from the current £35,000. That will cover the vast majority of savers, some 96 per cent or so. That much is clear. Those wealthy enough to have more than £50,000 to leave on deposit might be well advised to split their savings among a few institutions, just in case. Or, if such risks are uppermost in people's minds, they can always turn to the Northern Rock which, along with National Savings, offers an unlimited state-backed guarantee. But in any case, most savers know where they stand with regard to the limits of compensation. Trickier, and as yet unanswered, is the problem of the unfortunate home-seller, say, who very temporarily leaves a small fortune for a day or two at a bank during the sale of a property, only to find that the institution goes belly-up. It may be an extreme and unlikely case, but it is the sort of thing that is such an obvious risk that there ought to be some provision for it. Statutory deposit insurance, along the lines of compulsory car insurance, may be the answer here.

Less satisfactorily, the Government's consultation document is vague on how long it will take for the scheme to pay up. There will be no instant access. "At least a proportion", unspecified, of a saver's cash will be returned within "a target" of seven days of a bank "failing". Well, what proportion? Why just a "target"? When and who defines a bank as having "failed"? The remainder of a balance will be "returned within the following few days". Again, this is far too unclear and adds needless suspicion.

The trick in such arrangements is to make the guarantee so precise, unequivocal, impressive and credible that its very existence means that it will never be called upon. A banking system with instant and unlimited state-assured guarantees for all depositors and an explicit assurance, too, that they will always be at the head of the queue (in front of shareholders and other creditors) would never see a bank run, because there will be no incentive for the public to get their money out in a hurry.

Under such a sytem, rumours about distressed banks could be treated with equanimity by depositors. By contrast, complex, half-promises, hedged around with politician-speak, will never wash with canny savers. The Treasury should have learned that by now.