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Tuesday, July 22, 2008

Pre Funded Pot

Mervyn King, the Governor of the Bank of England, has told the Treasury Select Committee that banks should pre fund a compensation pot that would cover customers' losses in the event of another Northern Rock collapse.

He believes, quite rightly too, that the lack of a 100% guarantee of savers' deposits contributed to the run on the bank last year.

The current scheme is funded by the banks, which pay an annual levy. However, it does not hold enough money to compensate savers in the event that a bank collapses.

The Financial Services Compensation Scheme currently guarantees 100% of the first £35K of savings each person has at a bank.

That of course is not enough given the size of many deposits.

Mr King's suggestion is welcome. However, given the large number of people who have now deposited savings offshore with higher interest banks (eg in Iceland), this guarantee will not cover those in the event of a failure offshore.

It is very likely, given people's naivety about money, that these depositors are blissfully unaware that they are exposed to the collapse of their foreign banks.

That again could have disastrous effects on the economy.

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