The Government said today that its 100% guarantee on savers’ deposits in Northern Rock – a measure introduced in 2007 to shore up confidence in the ailing bank – will expire on May 24. In many ways this is a positive move: it’s a sign that the Rock is through the worst, and as such, is a step closer to the day when it can be returned to the private sector. It also technically levels the playing field again. But since this basically amounted to an implicit guarantee of all savings deposits, some may be a little nervous that it’s being removed before the economy has properly recovered. Time to put that cash back under the mattress?
At the time, the Government guarantee made a lot of sense. The run on the Crock as savers rushed to withdraw their money was having a crippling effect – and the Financial Services Compensation Scheme, which protects the first £50,000 of deposits, clearly wasn’t considered sufficient. By promising to stand four-square behind the knackered bank, the Government restored a bit of confidence and ensured the Rock’s survival – albeit at a cost to the taxpayer of nearly £30bn.
However, two years on, the Rock looks to be in a much healthier state: after hiving off all its dodgy assets into a so-called ‘bad bank’ at the start of this year, the ‘good bank’ is now a decent candidate to be flogged back to the private sector at some unspecified point in the future. So you can see why the Government is doing this now, with an election imminent: it’s making the point that a) its guarantee stopped an appalling situation from being even worse, and b) its policies have allowed the Rock to recover sufficiently to exist without this kind of protection. All good PR.
What might make a few people nervous is that although the Government never officially said it would guarantee all the deposits of every saver in every bank, that's what its intervention in the Rock case basically amounted to. So by implication, when the Rock’s guarantee is removed, the same goes for every other bank too. Of course most of the banks look a lot healthier now than they did a year ago – but if the economy slips back into recession and they find themselves in trouble again, anyone with more than £50,000 stashed in any one place might start getting a bit twitchy.
Then again, with interest rates as low as they currently are, there’s not much incentive to park your money in the banks anyway. Pity the FSCS doesn't apply to mattress deposits too.
In today's bulletin:
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Northern Rock savers to lose gold-plated Government guarantee
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