Mon 1 December 2008, BBC News

All banks are safe

By Robert Peston
December 1 2008 is a historic day for British banking - because it's the day when the chancellor by his deeds (if not his words) made clear that he's providing 100% protection for all retail savings and deposits in British banks. How so? Well in normal times, savers in a small bank such as London Scottish would have been protected only up to the limit of the Financial Services Compensation Scheme , which is £50,000 per saver. London Scottish defines the notion of a marginal bank. It is a genuine tiddler, with deposits of just £273m, and is not by any stretch of the imagination a vital cog in the financial system. In normal times, its collapse - which was announced today - would not pose a serious threat to the banking system. And therefore the rule of caveat emptor would apply to those who chose to deposit their cash with it. But these are not normal times. The chancellor fears that if any saver were to lose out from the demise of London Scottish, that could prompt significant and damaging withdrawals of funds from other small banks and building societies. To use the regulators' lingo, there would be contagion, possible runs at all but the very biggest financial institutions. There are for example about 40 building societies with deposits of less than £1bn each. So Alistair Darling has taken the extraordinary step of promising that no retail depositor in London Scottish will lose a bean, that all depositors will get all their money back, even if they've deposited more than £50,000 at the bank. If savings in a bank as small as London Scottish are fully underwritten by the Treasury and the taxpayer, then in practice there is 100% taxpayer protection for all retail savings in British authorised banks. Which begs the question why the chancellor doesn't simply acknowledge the reality and formalise this 100% guarantee. That he hasn't made explicit that he's adopted a policy of total deposit insurance won't make life any easier for him, as and when some kind of normality and calm returns to the banking system. The chancellor will, at some point, have to stand up and say that the £50,000 limit is a real limit. As and when that happens, there may well be a drain of funds out of small banks. So surely it would be better to explain now why he's guaranteeing all banks' retail liabilities so that there's some coherence to any subsequent decision to withdraw the guarantee. And if he were to guarantee the deposits in an explicit way, he might also be able to negotiate some kind of fee or reward for taxpayers from the bank beneficiaries.
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