Does the state guarantee bank deposits?

Discussion in 'The great financial debates' started by oysterman, Mar 4, 2008.

  1. oysterman

    oysterman Frequent Poster

    Posts:
    557
    A little bit off topic but I guess that in the wake of the "National Rock" fiasco, all financial institutions are now the beneficiaries of state guarantees so it's prudent for governments to intervene before rather than after the balloon goes up. I wonder how much Bertie knows about the solvency of the central/eastern European subsidiaries of our clearing banks?
     
  2. Brendan Burgess

    Brendan Burgess Administrator

    Posts:
    25,358
    HI Oysterman

    I have moved this post to here, as it is off topic.

    Some people might find your post misleading, so you might want to clarify what you mean and edit the title accordingly.

    Brendan
     
  3. Dum_Dum

    Dum_Dum Guest

    I hope there is no such thing - it essentially socialises any risk in banking. Northern Rock ought to have gone under. Why should the taxpayer bail out feckless bankers?
     
  4. Grus

    Grus Registered User

    Posts:
    31
    As feckless as they are, they are still responsible for minding a lot of the publics money. I don't think waking up to find all your savings with an institution have vanished and there's nothing you can do about it, would be an ideal situation either. Maybe heads of companies should be held responsible for the failings of their institutions, but luckily for them there is such a thing as limited companies.

    As for the state guarantee on bank deposits in Ireland; AFAIK you get 90% of your deposit back upto a limit of €20000 per institution (not account).
     
  5. Brendan Burgess

    Brendan Burgess Administrator

    Posts:
    25,358
    Let's be quite clear. There is no state guarantee for Irish bank deposits.

    There is a Deposit Guarantee Scheme. This is funded by all the deposit taking banks and not guaranteed by the state.

    The current amount of money in the fund is €400m.

    By comparison, the much abused Savings Protection Scheme of the Credit Unions has €110m in it.

    Brendan
     
  6. Grus

    Grus Registered User

    Posts:
    31
    Thanks for the correction Brendan
     
  7. Slim

    Slim Frequent Poster

    Posts:
    1,664
    The Credit Unions hold approx. €12billion in savings. How much do the deposit taking banks hold for the €400million?
     
  8. Afuera

    Afuera Frequent Poster

    Posts:
    413
    Is the protection scheme for deposits in the Post Office not state guaranteed?
     
  9. Brendan Burgess

    Brendan Burgess Administrator

    Posts:
    25,358
    Hi Afuera

    Sorry. The thread was dealing with bank deposits. I have edited my thread accordingly.

    Brendan
     
  10. kaplan

    kaplan Frequent Poster

    Posts:
    306
    The Irish state does not explicitly guarantee 100% of bank deposits. It provides for what is called a explicit deposit insurance under EC directive of a maximum guaranteed compensation amount of €20,000 to qualifying depositors. See here : http://www.irishstatutebook.ie/1995/en/si/0168.html The scheme is administered by the Central Bank and funded by banks and building societies.

    (Others provide higher amounts ie UK Stg31.7k, France €70k, US $100k). It is an ex-post scheme which means the banks are only obliged to fund the scheme at a rate of .2% of insurable deposits. It has what is called a reconstitution provision where if the fund is depleted it can call on further deposits from the banks.

    Because of what’s called the too big to fail doctrine (TBTF) it is recognised that governments are forced to step in with blanket guarantees when a systemic crisis emerge. Banks are simply too big to fail. Or some times, too many to fail. So there can be said to be an implicit state backing for banks and thus depositors funds. There are many examples of this, more recently Northern Rock.

    Most governments quite rightly do not provide blanket 100% guarantees as this would create unacceptable moral hazard problems with some banks taking on too much risk. Some people believe the markets will exert sufficient pressure on banks to behave ie pricing subordinate debt up where risks are seen to be too high and argue against the need to deposit guarantees. But this ignores the consumer protection dimension. People have to trust their deposits are safe and will be protected by the state.

    Deposit insurance is part of the financial safety net which also includes regulation and supervision and lender of last resort facilities for banks. The best forms, it is argued, have to be administered by statutory agencies such as the Central Bank and IFRSA here and the FSA, Bank of England and FSCS in the UK.

    Of course credit unions are not covered under the banks scheme and as yet there are no state provisions or it appears intention to provide a statutory compensation scheme for credit union savers. Internationally stand alone credit union deposit insurance is funded at higher levels typically 1.2-2% of insurable deposits reflecting the higher concentration of risks. This explains the difference between the banks deposit scheme here and the ILCU stabilisation scheme (not to be confused with depoist insurance) which had a low target of 1% and is currently only about .73%. If it were constituted as proper deposit insurance it should be between €210 - €280m. But that's another story for another thread.

    Finally the Financial Regulator here is a bit shy about advertising the existence of a scheme unlike the UK. Compare and contrast the consumer information here: http://www.fscs.org.uk/
    With
    http://www.financialregulator.ie/frame_main.asp?pg=/industry/in_bci_dps_intr.asp&nv=/industry/in_nav.asp and http://www.itsyourmoney.ie/index.jsp?1nID=93&2nID=96&pID=145&nID=385&aID=0

    Kaplan
    http://www.irishcuvoice.com/
     
  11. Brendan Burgess

    Brendan Burgess Administrator

    Posts:
    25,358
    Hi Kaplan

    If AIB or Bank of Ireland got into trouble, the government would probably have to step in.

    But would it have to step in to bail out a smaller deposit taker such as Anglo or Irish Nationwide? I don't think so. The Deposit Protection Scheme would sort out those who have guaranteed deposits and the other banks would replenish the fund.

    As a taxpayer, I would be annoyed if the government bailed out any bank. I would not have any problem with them providing liquidity which is what the UK government did for Northern Rock.

    Brendan
     
  12. Duke of Marmalade

    Duke of Marmalade Frequent Poster

    Posts:
    1,312
    Boss, I think your comparison with the Credit Unions' compensation fund is a bit misleading. As I understand Kaplan's comprehensive post, the Central Bank do guarantee bank deposits up to that 90%/20K max. They will fund this as explained but if the fund is inadequate in a particular situation they will simply by right levy the other banks more. The current size of the fund is somewhat irrelevant.

    By comparison, if the CU fund is inadequate in a particular situation there is no guarantee that the other members or anybody else will stomp up the extra funds.
     
  13. Brendan Burgess

    Brendan Burgess Administrator

    Posts:
    25,358
    Harchibald

    I was only comparing the size and not the function.

    I don't think that the Central Bank provides the guarantee. The Fund provides the guarantee. If the fund is not adequate, the guarantee might not be worth that much.

    It could well cope with the collapse of a small deposit taker, but would have problems with AIB or Bank of Ireland.

    Brendan
     
  14. Marie

    Marie Frequent Poster

    Posts:
    721
    The news on Friday was that AIB had 464 billion 'wiped off' its value but AIB doesn't seem phased; they've merely said they will be 'very cautious' in terms of their loan commitments. Given what you've said Brendan, does this make AIB risky for a depositor with savings over the compensation limit..........? Don't want to lose my pension nest-egg :(
     
  15. Brendan Burgess

    Brendan Burgess Administrator

    Posts:
    25,358
    Marie. I don't know what papers you are reading. AIB is worth about €8 billion.

    That is the number of its shares multiplied by the price of the shares.

    This goes up and down a lot. It doesn't always reflect what is happening to the business.

    I don't know the credit ratings of the Irish banks, but they are all fairly good. Rabobank is the safest with an AAA rating.

    Brendan
     
  16. kaplan

    kaplan Frequent Poster

    Posts:
    306
    Financial stability rather than consumer protection objectives underpin the Irish scheme. Brendan's probably correct; the To Big To Fail doctrine is likely to apply only to BOI and AIB with a reliance on the guarantee scheme to pay for the potential failure of other banks and building societies. However this has never been tested. There is a risk that a run on a small bank(s) could trigger runs on bigger banks. Even the best designed schemes could never be expected to deal with a catastrophic systemic failure or the risk of one occurring. In such cases the tax payer does have to step in and support or bail out troubled banks. It's also a concern that the scheme promises to pay out within three months ( with provision for extension) whereas in the US deposits are available for withdrawal after 48 hours.

    As far as coverage is concerned Ireland has the minimum required under EC directive at €20.000. However international experience shows the average coverage ratio at about 2.7 times per capita GDP. This may indicate that the current level of Irish coverage may be too low to engender public confidence in the event of a bank scare. Given that Irish GDP per capita is €41.2k (2006) this would suggest that coverage should be increased well above the current level.


    Kaplan
     
  17. Duke of Marmalade

    Duke of Marmalade Frequent Poster

    Posts:
    1,312
    kaplan, is the 20k/90% EU thing an absolute State guarantee? i.e. if the fund is depleted can't the State of right levy the other banks to meet the shortfall? In that respect it is different from the CU fund.

    I accept that above the 20K there are no State guarantees.
     
  18. Protocol

    Protocol Frequent Poster

    Posts:
    1,995
    Marie,

    it was Anglo Irish Bank, not AIB.

    And it was 464 million, not 464 billion!!!!


    €464m wiped off Anglo value after risk warning

    SIMON CARSWELL
    Fri, Mar 07, 2008
     
  19. Askar

    Askar Frequent Poster

    Posts:
    302
    Surely, the question of whether the taxpayer ultimately foots the bill depends on the governments perception of the systemic risk at the time of the crisis? If all savers suddenly felt their monies were not safe, and there was a possibility of a run on all the banks, then a smaller bank would be bailed out to prevent a snowball effect? Was this not the sort of thinking that led to the UK governments guarantee for Northern Rock deposit holders?
     
  20. oysterman

    oysterman Frequent Poster

    Posts:
    557
    I've just caught up with this thread split now.

    I am convinced that the level of guarantee in fact goes way beyond the 90%/€20k of the scheme.

    I simply can't see an Irish government standing by while bank customers lose following a failure.

    I'm thinking back to the emergency legislation they rushed through in the wake of AIB's negligent purchase of Insurance Corporation of Ireland and the fact that the government rushed on to Morning Ireland the moment the Ruznak story broke to reassure AIB customers.

    They'd do it again.

    The moral hazard argument is, in my view, compelling but I simply don't see depositors with any significant financial institution in this country being left out in the cold if there is even an argument made for a failure of regulation in the specific circumstances. The political cost would be too high.

    Nobody is going to get too worked up over the failure of some little credit union but there would be too big a political price to pay if a big player went down. That's politics.