Deposit guarantee schemes and unlikely risks

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dub_nerd

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(Split by moderator from RaboDirect thread.).

What are the chances that either the Irish or British government have to pay out on their deposit guarantees, and find themselves unable to do it (in a reasonable timeframe or at all). I rate the chance at considerably better than 2% ... the premium I am paying for keeping my money at Rabo.

(No connection/affiliation or reason to be sycophantic; as soon as I am convinced otherwise my money will be heading for better rates).
 
Re: RaboDirect Cuts Deposit Interest Rates

My one concern with banks covered by a UK guarantee is currency movement. Suppose Northern Rock go under (unlikely). The UK government guarantee is called upon. They convert the outstanding euro balance to sterling. A laborious claims and payout procedure ensues and eventually I get a sterling cheque for 100% of my euro amount. But in the meantime sterling has devalued significantly and when I convert back to euro I've lost a quarter of my balance. Is this possible?
 
Re: RaboDirect Cuts Deposit Interest Rates

MugsGame said:
My one concern with banks covered by a UK guarantee is currency movement. Suppose Northern Rock go under (unlikely). The UK government guarantee is called upon. They convert the outstanding euro balance to sterling. A laborious claims and payout procedure ensues and eventually I get a sterling cheque for 100% of my euro amount. But in the meantime sterling has devalued significantly and when I convert back to euro I've lost a quarter of my balance. Is this possible?
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In the highly unlikely event that Northern Rock goes under then the British Government will refund your EUR deposit in EUR. NR is owned by the UK government so the chances of it calling in the deposit protection scheme are very slim.

dub_nerd said:
as soon as I am convinced otherwise my money will be heading for better rates (from Rabo)
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Let me try ...

Bank A (NR): 100% UK Guarantee, it's owner is AAA rated (UK Gov) who could (in theory) print money and they have a market leading rate.

Bank B (Rabo): 100,000 EUR protected by the Danish Government, their owner is AAA rated but they have a low interest rate.

I would regard NR as being "safer" than Rabo and you get a better return on your money.

Although, I can't see either ever defaulting. It really is highly unlikely.
 
Re: RaboDirect Cuts Deposit Interest Rates

In the highly unlikely event that Northern Rock goes under then the British Government will refund your EUR deposit in EUR.
Click to expand...

I don't agree that the refund will be in EUR - you are into uncharted territory and I think it is quite likely in such a situation that the full EUR value may not be recoverable due to currency fluctuations, despite the 100% guarantee.

I agree the likelihood of us exercising the guarantee and finding out is very slim (I'm one of those who left their money in NR during the initial run). But I think it's one reason not to put everything in NR despite the (now) market leading demand rate (that said, it isn't going to prevent me moving money from Anglo to NR next week, and I'm not even considering Rabo due to the low rate, despite having an account all setup.).
 
Re: RaboDirect Cuts Deposit Interest Rates

The 100% NR guarantee is (AFAIK) a different animal and separate from the FSCS scheme which as you point out aligns with the EU regulations.

Even for banks covered by the FSCS scheme (e.g. Investec) I still believe there may be a potential loss depending on what exchange rate they use to convert Stg£50,000 back to Euro. I'm not really concerned about what currency the compensation cheque is in; I'm concerned what conversion rate will be used to calculate the value of the cheque.

I'm envisioning a situation where accounts are frozen for months while compensation is claimed, calculated and paid out, during which time exchange rates will have moved and the UK government will (naturally) be prioritising payments to UK nationals holding sterling accounts (despite the intent of the EU regulations that such discrimination should not happen.).

Anyway, I don't think it matters too much since I agree with you it's fairly unlikely we'll ever need to worry about the exact compensation mechanics (or, if we do, then the world economy will be so even more messed up that it won't really matter.).

On a related note, for banks covered by the Irish compensation scheme that opted out of the full guarantee, has the legislation yet been enacted to increase the compensation limit to €100k?
 
Re: RaboDirect Cuts Deposit Interest Rates

As you say ...

MugsGame said:
Anyway, I don't think it matters too much since I agree with you it's fairly unlikely we'll ever need to worry about the exact compensation mechanics (or, if we do, then the world economy will be so even more messed up that it won't really matter.).?
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This really is the crux of the matter.

There is a lot of hysteria out there regarding the potential for default when in my opinion the reality is that the risk is quite small.
 
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