Has the EU just saved you a packet?

The news that Icelandic taxpayers won’t be forced to bail out UK depositors’ losses in IceSave bank has caused a bit of a stir.

But the European Free Trade Association court ruling was bang on the money. And though it might look like bad news now, this may well be very good news for UK taxpayers down the line.

That’s because the court’s decision sends a very clear message: taxpayers should not have an open-ended liability that covers the losses of private banks. And for the UK, with its outsized financial services industry, this might be great news for the ordinary citizen.

I don’t think the banking crisis is over, you see. I think this ruling could save us a lot of heartache in the long run…

Courts stand up for the people

Private banks exist to make profits for shareholders and enrich staff (not necessarily in that order!). Taxpayers aren’t cut into the deal. So why should taxpayers backstop the industry? I can’t think of any other industry that enjoys that privilege.

The courts are taking the right approach. That is, the EU quite rightly insists that any bank operating within its confines contributes to a deposit insurance scheme. The idea is that every year the scheme collects subscriptions from firms regulated by the industry. As banks go bust (they inevitably do), the scheme provides a basic level of protection for depositors.

The court ruling has established that if there’s a spectacular bust and the deposit scheme isn’t sufficient, you can’t expect taxpayers to come to the rescue.

Let me just reiterate, these are private banks, and many of the depositors are large, international corporations.
In the case of Iceland, the court agrees that 320,000 innocent taxpayers should not end up carrying the can for its unruly banking industry.

Another investment by Gordon Brown

The Icelandic banks were among the first to get clobbered during the financial crisis. Our esteemed leadership wanted to keep UK bank depositors calm. So rather than wait for money to be repatriated from Iceland, they used UK taxpayer money to reimburse individuals immediately.

So, the savers with funds in the risky, high-yielding Icelandic banks got their cash back with interest. No worries! No hard lessons to be learned there. I mean, depositors could have at least forfeited the oversized interest payments they’d accrued…

But this is just typical of the way the guys in Whitehall deal with your money. It’s as if any amount used to mollify voters is money well spent. That’s the basic flaw with the system! Voters want freebies so enterprising pols hand them out. But that only works for so long. Click here to read a sobering report on where all this leads.

Of course the cash spent on propping up the Icelandic savers was relatively small in comparison to the much bigger backdoor bank bail-outs at home. There’s no way the government wanted to test the integrity of our financial services compensation scheme by allowing RBS or Lloyds to go under.

And this is the point - it’s the point that came out of the court ruling too. The bank deposit protection funds are simply not big enough to cope with a serious banking showdown.

And that being the case, the banks need to pay more money into building a better protection fund. Simple!
How about cutting down on some of those wage bills for starters?

And the talk of these weak banks paying dividends is beyond me. As Mervyn King says, spare cash should be used to shore up banks’ balance sheets.

Prepare for the worst

Unfortunately, the industry has always run rings round the politicians and the regulators.

The Irish farce is probably the best example. As money was draining out of Irish banks, the bank chiefs persuaded the politicians to guarantee all deposits. That one decision nigh-on ruined the country. As a result, the taxpayer is now stuck with massive loans to the IMF, loans that will take generations to pay off.

I hope this latest court ruling shows, once and for all, that this is not the right approach. Taxpayers can’t afford to make these guarantees.

Robbing Peter to pay Paul is morally wrong. Especially when Peter is a hard working taxpayer – and Paul ought to be a little more careful when deciding where to leave his cash.

The right approach is for banks to funnel more cash into industry protection schemes. How they achieve that, well, that’s another question. And it’s certainly one the industry must address.

But let’s not hold our collective breaths…

All of this is why I strongly favour a diversified approach when it comes to savings. Use a range of financial institutions and certainly consider savings outside the financial industry.

But because I always look on the bright side, let’s use today to celebrate one thing. Let’s celebrate some sensible law finally emerging out of the EU machinery. A law that may one day save ordinary, hard working folk from carrying the can for a rotten banking industry.

• This article is taken from the free investment email The Right side. Sign up to The Right Side here.

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23 Responses

  1. 30/01/2013, Mike wrote

    Useful article, if largely in retrospect; it would be even more useful if some comment could also be made on the safety or otherwise of current UK deposit takers regarding retail savings. For instance, would you touch Santander with a barge pole?

  2. 30/01/2013, Orb wrote

    There are many things English that are immoral and unethical; our history is riddled with such tales.

    That gazumping is an accepted practice tells the world a tale about the reliability of English ‘deals’; or that councils can evict home owners and lay claim to their homes tells the world how our government supports the people it represents. That Henry VIII torched the church and made a new one or killed his many wives tells the tale of the ends our elite will go to in order to realize their goals. And what about the rumours our ‘leaders’ encourage wars so we can sell arms to both sides?

  3. 30/01/2013, Adrian wrote

    Hello

    In principle, I agree with what you say, but I am afraid there are some flaws in practice.

    Flaw 1 government is not strong enough to force the banks to build up cash instead of pay staff bonuses and dividends.

    Flaw 2 by not splitting the banks even the moderately sophisticated investor cannot evaluate the risks.

    If the government did these two things then what you say is fine. As the government is partly responsible, I am less sure. I did not go with the high interest rates of the banks. However, I did have money in two of the other bad banks and did not realise the risks. If I an active investor made these errors what is the chance for Joe public.

  4. 30/01/2013, Neilyg wrote

    I was one of the lucky? depositors refunded by the FSCS as I had been led to believe I would be. Would I have invested if I had thought there was no such protection? What do you think?

  5. 30/01/2013, Boris MacDonut wrote

    Excellent article Bengt and bang on the issue as usual. The Courts are indeed our saviour as the politicians have reneged on their duty.

  6. 30/01/2013, J Nicholson wrote

    The majority of politicians, financial advisors/entities etc. are untrustworthy. Pensions which should be sacrosanct are pillaged. The government changes rules to suit themselves. Where is the meagre after tax savings safe? It took many years before i found out about the Alliance and Moneyweek, so i am now better informed, but i lost significant amounts through companies with FSA approval before then.
    What we need is a regulatory body financed through trading or similar, but completely outside of government control, transparent in procedures and open to regular audit.
    Banks are a buffer between savers and borrowers for which they should rightly receive a small commission. This is not high tech and doesn’t require a high flier to paid £m’s. Gambling on the other hand is not a banking practice, it is not even ‘investment banking’ and should be devolved from banks.

  7. 30/01/2013, Jay wrote

    “Some sensible law finally emerging out of the EU machinery”.

    Sorry Bengt, the European Free Trade Association (EFTA) is not the European Union (EU). It is a different group of trading nations. We used to belong to it before we left in 1973 to join the EU. Presently EFTA is Iceland, Liechtenstein, Norway and Switzerland.

    When we left EFTA there were 9 nations, including Austria, Denmark, Portugal, Sweden, Finland.

    Leaving EFTA was the big mistake. It could have grown to include most of Eastern Europe and, being a free trading group with no aspirations to pool sovereignty, it could have grown larger to include the US and Canada and some Commonwealth countries? It would have been bigger than the EU.

    It is not too late? Let’s leave the EU, rejoin EFTA, invite other disillusioned EU members to join, enlarge to North America and the Commonwealth… and live happily ever after.

    We would no longer be ruled by the ex-Maoist Manuel Barroso and the vampire Van Rompuy?

  8. 30/01/2013, Daily Observer wrote

    I normally like Bengt comments but this one I disagree with, is it to do with that Norwegian/ Icelandic relationship? Fundamentally if it had happened to the Icelandic people i.e. their money then there would have been riots in Iceland, their government would have had to step in pay. But no it was British money which has not been paid back and never will over £3.5 M could not be claimed back because the Icelandic regulators unfairly set a deadline for the claim (not normal) and hardworking Brits will loose their money and many others over the threshold also. The ruling was wrong you cannot take money from another country in this case UK /Holland everyday people and then vote not to pay it back, whenever this previously happened in history there was a war. The Icelandic people benefited enormously from their main bank, in the eyes of many across the world this will not be seen as victory for Iceland rather that they are an unmoral and you should never do business with them.

  9. 30/01/2013, LERENARD wrote

    The EFTA court ruling would only make matters worse. The average current account holder and saver will face higher costs and the risk of losing everything. What this ruling does is to let irresponsible governments off the hook and constitutes a total abdication of responsibility for proper regulation by the political establishment.

  10. 31/01/2013, Delshan wrote

    What right does the government have to shore up banks with taxpayers money, then adding insult to injury, the banks BOD reward themselves with large bonuses paid for out of taxation both to themselves & their staff.
    The whole BOD of both Lloyds & RBS should have been charged with stealing taxpayers money & been imprisoned for theft.

  11. 31/01/2013, Orb wrote

    …or better still, Delshan @10, the banks should have been placed in administration like any other ‘normal’ registered business unable to meet its financial obligations and unwound in an orderly manner.

  12. 31/01/2013, r wrote

    @Jay (7): What a lot of sense you speak. I’m in total agreement with you. I really do not understand why there are so many people in this country are still supporting the EU; we didn’t vote for it; it costs us dear; its books haven’t been signed off by its auditors for 18 years now; it is undemocratic; the main members of the EU do not keep to its rules (pig meat/fishing rights/free transfer of good into France etc) . . . I could go on.

    EFTA always seemed to work well and that principle, free trade, is what we signed up to in 1974. When we leave the EU, we can still adopt the good elements of it (standardisation, open borders – although the UK is the only country in the EU that doesn’t abide by that ) . Roll on the Referendum Day!

    r.

  13. 31/01/2013, Peter Jenkins wrote

    I agree with Orb so much. Any bank that failed to pay its debts should have been forced into administration and our government had no right to guarentee deposits in dodgy Icelandic banks (they were not even FSA approved). All those northern banks that were basically bankrupt would not have existed now.
    We may have had a bigger crash in 2007 but at least we would have been on the up for the last 5 years instead of slowly worsening our position. I think it is called “Moral Hazard”.

  14. 31/01/2013, Changing Man wrote

    Good news? Hmmm! So if a UK bank goes bust we don’t have to repay foreign investors? Will this lead to a loss of confidence and withdrawals of foreign cash from UK banks further weakening them? Does this ruling make our own deposits in Irish, Spanish or even UK banks more secure or less? I.e. will it enable HMG to weasel out of repaying guaranteed deposits if a bank collapses? I am guessing they couldn’t afford to anyway?

  15. 31/01/2013, Matt wrote

    The icelandic banks were not offering “oversized interest payments”, they just happened to be the top of the best buy tables at the time. Going with a UK bank would have only lost you around 0.5% interest (not much when interest rates were around 5-6%). Also, as far as the average saver was concerned, they were no more risky than any other bank. They were covered by the FSCS – just like all the UK banks – and the savers were paid their money, as promised, from the fund. It’s not like there was no protection and the government just decided on the hoof to reimburse the money. The problem was that the FSCS wasn’t designed to cope with a banking collapse on that scale, so the banks hadn’t contributed enough and taxpayers had to foot the bill. Savers did lose money since they were not accruing interest in the 3 or so months that it took to get their money back.

  16. 31/01/2013, Eastbeach Dave wrote

    What ever is adjudged by any court can be overturned when the ruling thieves want it to be. The entire banking system is rotten to the bankrupt core and the whole puss filled greedy bubble will burst all because the Bankers and Politicians have gone unchecked for decades and are now the biggest liars and thieves in society. A revolutionary realignment is inevitable and soon. Buy physical Gold and Silver preserve your wealth. Do it now

  17. 31/01/2013, Robin wrote

    There are quite a few industries that enjoy similar protections as the banking industry. The car manufacturers were heavily supported during the crisis. And the house builders.

  18. 31/01/2013, Oliver W wrote

    I was also one of the lucky ones; I had about 18k in a high interest account with Icesave for a few years, and then when it all went pear-shaped the UK taxpayer bailed me out – in full!

    I do agree with you that there should have been some kind of penalty, at least foregoing some or all of the interest that I’d earned. I think any Icesave depositor would have admitted, to themselves at least, that that would have been fair.

  19. 31/01/2013, Changing Man wrote

    Once again we are only hearing part of the story! We mustn’t lose sight of the fact that as well as virtually every county council in England, charities and hospices appear to have lost vast amounts of money in Icesave? I can’t imagine that they would share Bengt’s view that this is cause for “celebration”? Peter the UK takpayer was robbed but not to pay Paul the UK ratepayer who was robbed too!

  20. 01/02/2013, Post wrote

    15. Matt.

    It looks as if the author is part of a ‘politically motivated group’ that have ‘forgotten’ about the North Atlantic banking meltdown originating in the U.S. and are looking for a scapegoat?

  21. 04/02/2013, ian wrote

    I believe there is a fundamental flaw with the way the Banks are regulated. Given that they are allowed to create credit for borrowers at ludicrously low Basle3 cover, I find it completely baffling that they are allowed to use the same mechanism to magic up funds for their own investment arms. Banks with Banking Licenses should not be allowed to participate in any other form of ‘investment’. This is a product of the incestuous relationships in the City, the so called regulators, and the political ‘Executive’.

  22. 04/02/2013, 4caster wrote

    Starting with Northern Rock, the banks’ bad debts and losses were nationalised, whilst their assets and profits remained in private hands. RBS was kept solvent by a huge infusion of state capital, but the Treasury will not exercise the control its majority ownership should have bought. LloydsTSB was rushed and conned into rescuing HBOS, very nearly bringing the entire Lloyds Banking Group down, requiring another RBS-style rescue.
    The public pays for all of this, both as taxpayers and through huge interest rate spreads.
    To give an example, in 1993 I opened an interest-paying current account with Bank of Scotland. Base rate was 10.5% at the time. The current account paid 3% on balances, and I could borrow on unsecured overdraft at 13%, a 10% spread. Nowadays it pays zero interest on balances, and the overdraft interest rate would be over 20% if I were stupid or needy enough to use it.

  23. 07/02/2013, Roger wrote

    “So why should taxpayers backstop the industry? I can’t think of any other industry that enjoys that privilege.”

    There are several, but farming comes top of the list. e.g. mad cow disease, thought to be caused by the farming practice of grinding up one set of animals and using the result to feed others – the taxpayer provided compensation for every cow slaughtered.

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