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Why withdrawal of Rock guarantee matters

Robert Peston | 10:10 UK time, Wednesday, 24 February 2010

The government's decision to withdraw the guarantee that no saver in Northern Rock could lose even a penny if the bank went kaput has wide implications.

Northern Rock signThe least important is that the reconstructed nationalised bank - with the bad bits taken out - is well on the way to being privatised.

More important is what it means for the security of savings at other banks.

Because while Northern Rock's savers benefited from a formal guarantee from the government, the Treasury was also in effect promising that no saver in any British bank or building sociey risked losing a penny.

So in withdrawing the Rock guarantee, the chancellor is in effect restoring an element of caveat emptor to the entire banking market.

To be clear, the banks' insurance scheme - the Financial Services Compensation Scheme - provides cover up to £50,000 per customer.

But if you have more than that in a single bank, well that increment is at risk. You can lose money if your bank has insufficient assets to meet its liabilities.

How would you know whether your bank is prudently managed or not?

There's the rub. Millions of us wouldn't have a clue how to make that judgement.

But most of us instinctively - and correctly - know that some banks are too big and important to fail, that they would always be bailed out by government were they to run into difficulties.

So those banks have an unfair competitive advantage: they attract more funds and at a lower interest rates than the smaller banks and building societies that are less important to the economy and can't be sure that they would always be protected by the Treasury from falling over.

Which is why it matters so much that those too-big-to-fail banks (you know who they are) don't abuse the protection given to them by the state - by us, by taxpayers - to take excessive risks in pursuit of incremental profit and bonuses.

Comments

  • Comment number 1.

    RP, respectfully i believe it is not £50k per bank, but £50k per banking licience. This is significant where different high street names share the same licience. people can google the subject if it affects them. Are Ireland going to continue their 100% guarantee, if so i suspect there will be a large outflow of funds from the UK






  • Comment number 2.

    Robert: millions of us rely on people like you to expose banks where management is lacking. For example, there were plenty of articles in the months leading up to Icelandic bank collapse pointing out that there was something not right. Indeed was not some of the criticism of local authorities that did put money, even at the last moment, with the Icelandic banks that a simple reading of the FT would have shown that there were major issues.

  • Comment number 3.

    Why remove this failsafe ? makes me think there is something I should be worried about.......if the bank is safe , it will not cost the government anything to provide security...and for any bank for that matter , .more troubled times ahead ?..best move my money

  • Comment number 4.

    Poor timing, they should have waited until the economy was completely recovered.
    We need more people depositing money not less.
    And what on earth is Alistair Darling doing prattling on about his ill-timed doom prognostications of last year?
    We all knew he was right but he did not need to bleat on about it and impair confidence.
    Alistair is now a liability .....why is he whining before an election?

  • Comment number 5.

    Well that's stating the bleeding obvious.

    The individuals at the top of the banks owe so much to the British tax payer. The nonsense of the chairmen saying 'I will not take a bonus' is such transparent spin of pretending they were entitled, but they are doing the 'right' thing.

    The banks continue to abuse and the state is allowing it to happen. A large proportion of their profits should be handed back to alleviate some of the deficit. Alternatively, slash their margins/spread so that savers get a better rate and borrowers are charged less (this will help the economy as people will have a bit of spare cash in their pockets).

    Anyway, what coffers has the government got to actually bail out bank now, so it is wise to say:

    'But most of us instinctively - and correctly - know that some banks are too big and important to fail, that they would always be bailed out by government were they to run into difficulties.'

    The whole situation is absurd, and is a neverending spiral staircase of digital money creation.

  • Comment number 6.

    What future for NorRock's independence now?

    By the way how many of those 'too big to fail' banks took advantage of the Bank Of Englands 'free cash' or QE and lent it out at 'market rates' to these smaller financial institutions, building societies, banks etc?

    Is that where some of the dubious profits these big banks have magically made?

    Is this their idea of 'lending to business'?

    Its also linked to your Greece/Goldman piece, it does beg the question whether this 'cheap liquidity' perhaps was lent out, by the 'too big to fail' banks (Barclays and the rest) to Greece and no doubt many others, at 'exorbitant' market rates?

    No wonder GB wants a tax on transactions. I wouldn't mind a few bob commission on these either!

  • Comment number 7.

    Yes, and it means the Government should hurry up and start breaking up the big banks.

    It also means that, as soon as possible, we need a sea change in the amount of information a bank has to declare about its operations.

    If the "people" are to have much greater ownership of the money system, then we need a huge amount more transparency from all financial intermediaries and institutions.

    This can only lead to better competition, less volatility, and a huge transfer of wealth from the bankers and bank owners themselves, to ordinary borrowers and savers, which will be of enormous benefit to the productive economy of the UK.



  • Comment number 8.

    Yes Robert, a piece which really explains nothing that the headlines haven't and for the average person it is an irrelevance.
    It is unremarkable except as a public service statement.
    People must realise that banks are businesses and they are there to make profits from shareholders and depositors - maybe a few more going to the wall would have shaken up the system with far more effect.
    All that is happening now is that that we are in a period of healing before the next cycle of boom and bust - it is the unfortunate condition of the human race - an illness that ultimately has no cure. The natural greed of the human animal becomes insatiable due to it being whipped up into a feeding frenzy by the prospects of endless money supply and the bankers whoop and holler from the sidelines urging it on. Those very same banks having now overspent their feeble brain capacity have been bailed out by the government by mortgaging the nations wealth and does this change their attitude - of course not. We have already started down the same road again with bonuses for risk taking, house prices rising and gradually this will snowball into another period of economic miracle!
    What we need is industry in this country whereby we add value to something and sell it for a profit that is sustainable not some glorified national Ponzi scheme.

  • Comment number 9.

    down to my last tenner as i await fridays benefit payment so wont lose much sleep over it.

  • Comment number 10.

    So the safest place to put your money is with the banks that are free to act as gambling dens.

    Also makes it harder for new banks to get established.

    More good news for the too big to fail banks, it helps them rip off the public further.

  • Comment number 11.

    How long before the money lent out comes back into my (taxpayer) pocket?
    Or will the banks let the country go to the brink to make more cash?

    Cynical? Me?

    As if the banks have not thought of it first.....

  • Comment number 12.

    "There's the rub. Millions of us wouldn't have a clue how to make that judgement. "


    The whole reason why a system of accounting for banks has to be introduced that allow normal people to understand the position they are in.....until that time we have to rely on Government to ensure rules are in place to prevent us being taken for another ride at some later date.

  • Comment number 13.

    Any chance that date may correspond to a General Election?

  • Comment number 14.

    Sorry Robert, I don't share the idea that there are banks left too big to fail; true, a couple of months ago the term was "system-relevant players" that had to be bailed out by all means. Those "means" by far have been used up; they have not healed the problems but created new ones and those new ones are some sizes bigger. The system relevance today is questioned on a broader scale than 18 months ago because it is the system that has become questionable. Where the means like sovereign debts have lost any decent GDP ratio while same are in constant decline and fighting global labour and commodity battles which they very likely will not win the system is at stake – it is about to collapse or shall we rather say implode.

    Is Greece system relevant or is it the death of the Euro?

    Then, who will bail out the system?

  • Comment number 15.

    Robert

    Which is why it matters so much that those too-big-to-fail banks (you know who they are) don't abuse the protection given to them by the state - by us, by taxpayers - to take excessive risks in pursuit of incremental profit and bonuses.


    XXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXX

    You know that we can trust them not to.

    You know we have all of the safe guards we were promised in place now.

    And Brown is not a bully and never bullied his Chancellor.

    Underpants on head

    Pencils up nose.

    Wibble

  • Comment number 16.

    Another run on NR then?

    Labour seem to be planning to lose the election, but to make it as bad as possible for the incoming government. This is why they aren't bothered about the nation's debt - not their problem to clear up.

    Nice.

  • Comment number 17.

    Its all virtual world of money I owe you, you owe me and at the end of it no one actually precisely knows how much is owed and to whom. Major banks will never be allowed to fail- that would lead to anarchy! Hence they always be rescued by money printed out of thin air. I think movie 'Zeitgeist Addendum' available free on Google (google the title)explains how the world is managed by few rich!

  • Comment number 18.

    Everything's fine.

    The sum total of this announcement is that NR is now in the same boat as every other high st bank - the FSCS still applies to the first £50k of any savings, just like Barclays et al.

    Move along please, nothing to see here...

  • Comment number 19.

    This matters a lot to Northern Rock as an organisation. The Government Guarantee was not provided free of charge - Northern Rock paid a hefty fee for it, and it has contributed to the large losses that the Rock has sustained in recent times. Now I recognise that as the Government owns the Rock this can be seen as money pocket swaping, but eventually (not this year?) the Rock will be returned to the private sector and, shorn as it is of bad debts, will be an attractive proposition to quite a few organisations. Many of us look forward to that day.

    Indeed there are many who consider that had the Rock not fallen foul of King's "Moral Hazard" approach and got the loans it required (to meet mortgage advances that had been promised but not yet financed) the whole need to Nationalise the bank could have been avoided. That would not have prevented the problems at Halifax/BOS/Lloyds and RBS which had very different (and perhaps more worrying causes), but would have prevented the run which did untold damage to confidence in the UK as a whole and has contributed to the depth and length of the current recession.

  • Comment number 20.

    AS NR is ownjed byt the taxpayer:

    IF NR is sound then the garantee costs nothing but draws in savers.

    IF on the other hand the goverment knows different (and as prudant share holder i hope they know everything) then the garantee is a massive liability

  • Comment number 21.

    #7
    'Yes, and it means the Government should hurry up and start breaking up the big banks.'

    Agreed, but we need to sell NR, RBS and Lloyds first.

    #16
    The GE is irrelevant, people will vote for change, and get more of the same!

  • Comment number 22.

    So the Northern Rock guarantee ends on 24 May.

    Very close to the time limit when the election must be had, I notice, but at least we now know the election will be before 24 May?

  • Comment number 23.

    8. At 11:02am on 24 Feb 2010, Peter Fox wrote:
    Yes Robert, a piece which really explains nothing that the headlines haven't and for the average person it is an irrelevance.
    It is unremarkable except as a public service statement.
    People must realise that banks are businesses and they are there to make profits from shareholders and depositors - maybe a few more going to the wall would have shaken up the system with far more effect.
    All that is happening now is that that we are in a period of healing before the next cycle of boom and bust - it is the unfortunate condition of the human race - an illness that ultimately has no cure. The natural greed of the human animal becomes insatiable due to it being whipped up into a feeding frenzy by the prospects of endless money supply and the bankers whoop and holler from the sidelines urging it on. Those very same banks having now overspent their feeble brain capacity have been bailed out by the government by mortgaging the nations wealth and does this change their attitude - of course not. We have already started down the same road again with bonuses for risk taking, house prices rising and gradually this will snowball into another period of economic miracle!
    What we need is industry in this country whereby we add value to something and sell it for a profit that is sustainable not some glorified national Ponzi scheme.

    >>>>>>>>>>>>>>>

    Robert - you are right to be concerned about the boom bust aspect of our economy. I suggest you read the book Boom Bust: House Prices, Banking and the Depression of 2010 - I read this about 3 years ago and it makes the case about our housing cycle. One solution is to levy capital gains tax on all house sales (with perhaps a taper relief for long-term residents) as a means of reducing the speculation element in housing prices in the UK. This solution is unlikely to happen because it would be so politically unpopular in the UK but it might be worth reading it so you understand when the next cycle occurs and can plan things accordingly.

  • Comment number 24.

    With economic recovery well on its way and the prospect of a Labour victory at the next election assured this is a perfectly rational approach to address the consequences of a recession caused by The Yanks and their banks.

    I don't think.

    I wonder how Northern Rock depositors will react? This might be even more interesting than the General Election.

    Can someone please tell us what did finally happen to Granite?

  • Comment number 25.

    4. At 10:52am on 24 Feb 2010, onward-ho

    Perhaps he is doing it from a genuine belief that bolstering confidence whilst retaining the current system won't get us out of it this time?

    Take a look at these pieces re Greenspan and from Martin Wolf;

    http://www.bloomberg.com/apps/news?pid=20601087&sid=a1aLQ51QXlDA&pos=3

    http://blogs.ft.com/economistsforum/2010/02/the-world-economy-has-no-easy-way-out-of-the-mire/

    and if you want some analysis, this piece from Yves Smith (she links to the Martin Wolf piece and the 'doom loop' piece I linked to yesterday;

    http://www.nakedcapitalism.com/2010/02/martin-wolf-is-very-gloomy-and-with-good-reason.html

    Martin Wolf is usually pretty forthright in cutting through what he sees as excessive doom mongering and grandstanding. He is greatly respected and this is a significant article.

    We are not in a normal situation. It is not just going to get better on its own and if we do scrape through this time it will be far worse next time around. There is pretty compelling data from all sides on this, why ignore it?

  • Comment number 26.

    "How would you know whether your bank is prudently managed or not?"

    Well the sensible assumption has to be that it isn't especially given the ongoing addiction to the bonus system which tells you that banking managers just aren't connected to the real world...

  • Comment number 27.

    #23 EmKay

    IMHO CGT on houses is not a solution to house price speculation. It is easily circumventible (legal tax avoidance) by those with loadsofmoney and creates an entry threshold into the highest value properties that further limits access to such properties to only the loadsofmoney set.
    There are strong cases for examining the whole buy-to-rent market and what that does to prices. There is also a case for looking at the rules that determine when CGT on multiple residential property ownership is levied, but again, too strigent and this not only restricts access unless you are already loadsofmoney, and potentially could harm the private rental market, such that low value rentals become non-viable.

    Unfortunately, the massive increase in supply that is needed coupled with population increase controls and re-distribution of employment to less favoured areas are also exceedingly unpopular, and will do nothing for any political career....

    And of course as a result of the 'depression' house building/selling has stagnated such that there is an even greater pent-up demand for 'new' homes, thus giving owners/sellers the incentive to raise prices even further, hence contributing to the silly price rises pre- return to Stamp Duty

  • Comment number 28.

    About time this guarantee was witdrawn.

    It has given Northern Rock a huge advantage in attracting large sums of money as against the building societies and other savings institutions who are struggling to attracct funds.

    There are many people who do have large sums invested with NR. They are taking a breather from constantly moving amounts around of less than £50000.

    In the meantime it is up to the government to make sure these large too big to fail banks are broken up into manageable portions where they are small enough to insure against failure and the insurers not the taxpayers will guarantee that our money no matter how much it may be is guaranteed.

    The casino banks can then go their own way and people can gamble if they want to but not at the taxpayers expense.

  • Comment number 29.

    The only way to maintain high house prices (relative to income) in the longer term is to (continue to) exclude lower income households from the market.

    Unfortunately this appears to be the way it is going; wealthier people have a vested interest in this approach, they can have a nice house of their own and make money renting houses to others.

  • Comment number 30.

    About time too, that the total guarantee was withdrawn from Northern Rock depositors. However, have the Northern Rock board sorted out insurance to continue that 100% cover guarantee so that they can still attract as much in deposits as possible?

    And, have the other banks been sorting out their insurance cover to give themselves a competitive edge over foreign banks in collecting deposits?

    None of them should be too big to fail and all of them should protect their depositors.

  • Comment number 31.

    27. At 1:07pm on 24 Feb 2010, p45builder wrote:
    #23 EmKay

    IMHO CGT on houses is not a solution to house price speculation. It is easily circumventible (legal tax avoidance) by those with loadsofmoney and creates an entry threshold into the highest value properties that further limits access to such properties to only the loadsofmoney set.
    There are strong cases for examining the whole buy-to-rent market and what that does to prices. There is also a case for looking at the rules that determine when CGT on multiple residential property ownership is levied, but again, too strigent and this not only restricts access unless you are already loadsofmoney, and potentially could harm the private rental market, such that low value rentals become non-viable.

    Unfortunately, the massive increase in supply that is needed coupled with population increase controls and re-distribution of employment to less favoured areas are also exceedingly unpopular, and will do nothing for any political career....

    And of course as a result of the 'depression' house building/selling has stagnated such that there is an even greater pent-up demand for 'new' homes, thus giving owners/sellers the incentive to raise prices even further, hence contributing to the silly price rises pre- return to Stamp Duty

    >>>>>>>>>>>>>

    p45 builder -

    not sure I agree with your analysis:-

    Yes there will be some tax avoidance but on the whole for the residential market, monies pass through the hands of solicitors and it would be this point where the taxes could be collected.

    there would also be a beneficial effect on house prices in keeping them reasonable. There might be some suppression of house prices (note probably not falls just not ridiculously large increases) but houses would not change hands as quickly. On your note about the buy to let market, you may get more 'accidental landlords' if you have a CGT taper relief and this will help keep rentals down which although might deter new entrants would probably keep the rental market available.

    More importantly the first time buyer market would NOT be subject to such a tax and therefore give the construction industry a more reliable market instead of the feast and famine that comes with the boom and bust.

  • Comment number 32.

    1. At 10:38am on 24 Feb 2010, Kudospeter wrote:

    "Are Ireland going to continue their 100% guarantee, if so i suspect there will be a large outflow of funds from the UK"

    A guarantee which has no backing is about as useful as a credit default swap.
    The Irish Government can talk about any guarantee they like - they are unable to honour it.

  • Comment number 33.

    24. At 12:39pm on 24 Feb 2010, stanilic wrote:

    "Can someone please tell us what did finally happen to Granite?"

    Good point - that was one that got brushed under the carpet.

    The rip offs just keep on coming - and the public just bend over further to facilitate.

  • Comment number 34.

    26. At 1:06pm on 24 Feb 2010, Wee-Scamp wrote:

    "How would you know whether your bank is prudently managed or not?"

    I think you're supposed to use these guys...

    http://news.bbc.co.uk/1/hi/business/8534022.stm

    Lies, lies and more lies - you cannot build an Economy on lies....

  • Comment number 35.

    No revolution - oh how can you be so dismissive?

    http://news.bbc.co.uk/1/hi/world/europe/8533240.stm

    Of course the self-centred though this would blow over without a fuss - they can only see things from their, or their countries perspective.

    Take note - this will be the UK once it all starts to sink in with the Proles.

  • Comment number 36.

    Regular people needs some easy-to-understand measure of how well a bank or building society is bing managed. Then poorly managed banks will see an outflow of deposits to their better managed competitors, providing an incentive for them to improve.

  • Comment number 37.

    It would be helpful if the government instituted some controls over the banking business that prevented them from gambling the depositors money away again. That might restore some confidence.

  • Comment number 38.

    If this is about the wearying point that 'Banks are too big to fail' then I guess we have to reduce them in size to a point where they aren't------ rather than wring our hands and debate endlessly about how many clever accountants they'll need to dance their way around any financial regulation we can devise.

    If it's about Northern Rock...then that was all about trying to maintain electoral balance in a heartland.

    The Bad bank bit (which is a lot bigger than the good bank part) .. will just slide to extinction as the mortgages are repaid ---or not repaid as the case may be..... when the houses will be repossesed and sold to the time when all the loans are finished and the last person switches out the lights.

    The good bit will be sold and after the initial assurances on jobs from the new buyer, they'll probably get rid of the name and most HQ functions and take the well performing debt away and leave a local HQ and maybe the odd call centre

    But all this will happen well after the election...for election purposes (repeat after me) "We (The Government) stepped in and saved Northern Rock , and when it is sold it will have a good chance of making a profit for the tax payer"

    On Tyneside this may affect voter intentions positively ...on Teesside (part of the Homogenous 'North East' for most national media) the Corus debacle has already seen some very strong remarks about voter intentions of a non-positive nature---- it's all extreme micro-managing of economic issues but I suppose every little helps

  • Comment number 39.

  • Comment number 40.

    Another bank story.

    How novel.

    GC

  • Comment number 41.

    33. At 2:02pm on 24 Feb 2010, writingsonthewall wrote:
    The rip offs just keep on coming - and the public just bend over further to facilitate.
    -------------------

    It is because debt enslavement is far effective that having and army or police force, people become docile and submissive.

    It's conspiracy but majority of people still prefer to believe that there's economic logic to all this as they hope the "good times" will return.

  • Comment number 42.

    This is merely another of a number of steps that need to be made before NR can be sold off.

    The "good" and "bad" bank split took place effective from 01/01/2010 and I imagine pretty much anything that even got close to looking like a risky loan will have gone to the bad bank being held by the UK taxpayer effectively in run off.

    Other institutions have been kicking up a fuss, quite rightly, re the advantage NR have re the guarantee so it had to go sooner rather than later.

    Three months notice needs to be given of the withdrawal of the guarantee and so if the poor mug punters that rescued NR (i.e. you and I) are to get our money back in 2010 via even a partial float or sell off then the guarantee needed to go ASAP.

    There is as many have said not a lot to see here. Its just another step towards NR being sold off.

  • Comment number 43.

    Which is why it matters so much that those too-big-to-fail banks (you know who they are) don't abuse the protection given to them by the state - by us, by taxpayers - to take excessive risks in pursuit of incremental profit and bonuses.

    Could we assign a probability value to this?

  • Comment number 44.

    34. At 2:06pm on 24 Feb 2010, writingsonthewall wrote:

    Lies, lies and more lies - you cannot build an Economy on lies....

    My sentiments entirely!


  • Comment number 45.

    I thought we had things called auditors that went around looking at companies (and banks) P+L accounts and balance sheets making sure that the financial things they've reported are true and financially correct.

    Maybe if the auditors were liable for the accounts they've signed off they would take a more healthy look at the banks balance sheets and the public could trust them as a basis on where to put our money.

    Please correct me if I'm wrong but haven't all the auditors that signed off the accounts of the failed banks (thereby agreeing with the banks valuations of all their assets, mortgages, CDS options etc.) got away scot free?

  • Comment number 46.

    Approximately 9 months or so ago there was an article in the press that the safety was to be increased to approximately £100,000. by the EU in February 2010, is this still under consideration or has the idea been abandoned ?

  • Comment number 47.

    Robert

    Yes we need to see Northern Rock sold off. And our stake in RBS and Lloyds. It is not the business of government to run banks, but they are doing so now as a proxy for Gordon Brown having failed totally to regulate them. That doesnt mean we have to be stupid and hope they fail.

    If Lloyds is worth just short of £40bn at today's price then our share at 41% is around £16bn. Not as much as we lent them, but a good enough reason for us to want them to succeed to the point where we get our money back. Say at £1 we would stand to get back £30bn. Not far short of the Defence Budget. Ditto RBS and ditto the good bank part of NR (the rest of NR is a goner).

    When all the rhetoric about banks is totally exhausted, as it will be one day, we will have to look forward to a banking system where banks like Lloyds, with its 150,000 employees provides work for people, who pay taxes and spend their money in shops. And the banks themselves provide banking services and pay taxes on their profits (which should be regulated if there is a suspicion as at present that they raking in money through borrowing cheap through QE and stinging us). Demonising banks for the unsupervised bad deeds of a few has no future if we want to go forward.

    MRA2

  • Comment number 48.

    How many people actually have more than £50k invested with NR after Mr Peston created the run on this establishment?

    I wonder if he would have done something similar to a Southern based bank if the situation arose.

    God help us if the Tories get in, lest we forget how they brought the country to the brink of civil war during the miners strike,closing the pits(how much coal do we now import), privatising the gas/electric/water suppliers(oh how the rich get richer) the poll tax, taxation on pensions, facilitating closure of final salary schemes & contribution holidays on pensions when in surplus - the real reason the pensions funds are in trouble.

    Not to mention selling off the council house stock, allowing a change of demographics that has resulted in the morals of previously "private" housing being eroded on the principal of one bad apple.

    The tories couldn't run a bath, let alone this country.



  • Comment number 49.

    RP is the business editor and writing about banks again. Of course, he has to as we've closed down the rest of the economy.

    We do have another industry: house price bubbles. Even now, the average house price is around three times the salary of the top ten percentile. That sounds to me, more like banks lending out too much money than anything that can be tackled by CGT or building more.

    As I've said before, most of us want some simple place to take care of our deposits, provide a credit card and a modest mortgage, an organisation that doesn't take risks or need saving or cash injections. In fact, we need something that's not much more than the old PO Savings Bank mixed with an old fashioned, local building society. Is that difficult?

  • Comment number 50.

    Hardworkinghobbes:

    Auditors can be liable if they negligently produce accounts but there are two big problems:

    1. Most people still fail to accept that auditors are not liable for fraud by the company - auditors are not bloodhounds or policemen their job is not to hunt down fraud.

    2. Mark to market accounting for banks makes the audited accounts even more meaningless than most company accounts.

    I would strongly advocate that mark to market accounting for long term loans has been a complete shambles. Not only did it mean that bank audited accounts bore no relation to reality as far as the traditional lending book was concerned but it also active encouraged banks to abandon relationship banking and trade customer loans (after all if you going to be penalised for holding on to a loan rather than trading it, you might as well trade it).

    I still feel that we should have a system where banks can choose to have a govt guarantee (up to a certain level) or not but have to pay an annual fee for it. If a bank chooses not to pay the fee then if it gets into trouble the govt does not step in - this of course means that banks who are in the "too big to fail" catagory have to shrink

  • Comment number 51.

    What proportion of savers have +50K cash in there - a very small percentage I would estimate?

    The result of a bank default is that those with more than 50K would scarcely bat an eye for anything lost over 50K (but of course still complain)- and this is probably why the guarantee is being withdrawn - there might even have been some 'due diligence' carried out for once?

    Can't see a big problem with this myself (even though this flies in the face of Bullydog Trillionaire's rhetoric from a year a go).

    The bigger issue is competition - while the government manage these state controlled banks - this is surely distracting from the need for new ethical bnaks to create more competition - so that people like me can transfer their funds and walk in protest at the way some of the banks have been and still are being run.

    I mentioned this about a year or so ago - the conflicts of interest and inefficiency of having a government control market orientated banks.

    Get them sold - smash up the big ones and let's have some new banks!

  • Comment number 52.

    WOTW Do you have a list of FATW contenders when the revolution comes ?

  • Comment number 53.

    Robert,

    NR

    If we read the small print this 'change' is not as it seems at first sight. For existing depositors with term investments will still be protected fro the term of their deposits - only new depositors will be subject to the new terms and conditions.

    Any way as you and others have pointed out at the start of this long depression the state has demonstrated that as soon as there is a run on a banks it jumps in to bail the bank out. If depositors feel this to be untrue there will be a rush to split all deposits into 50K tranches under different FSA registrations - this may tend to destabilise the market.

    By the way haven't former NR shareholders failed in all of their court actions? As many on this blog predicted!

    The bigger picture:

    Absolute no substantive reform of the banking system has taken place yet! They are still too big to fail!

  • Comment number 54.

    The Treasury has given its required three-month notification: guarantees re Northern Rock deposits will be lifted May 24, 2010.
    After May 24th, customers will receive the SAME LEVEL OF PROTECTION that all British savers get:
    The government insures the first 50,000 pounds (57,045 Euros) held by every British saver. The guarantee applies to EACH financial institution where a customer has an account(s).
    Therefore, the only ramification that I can see is that wealthy savers may elect to hold e.g. ten accounts, ten different banks so that their entire savings are covered.
    Personally, I don’t foresee a major exodus from Northern Rock come May 24th.
    The interesting part is that preliminary to sale, Treasury has sliced Northern Rock in two.
    The “good bank”: £10B worth of mortgages & £19B worth of deposits.
    “Bad bank” with the remaining £55B worth of mortgages.
    The good bank will be sold; but the bad bank will remain under government control until the term of all existing mortgages has expired. If course, the "bad bank" cannot make loans.
    The process of delineating good and bad has been (is) so complex that Northern Rock says there is no established sale date for the good bank and no established date for Government’s lifting of the 100% guarantee.
    In any case, when the government guarantees have been lifted, Northern Rock’s savers will be protected by the Financial Services Compensation Scheme, which guarantees up to £50,000 worth of savings for every investor.
    So what’s the big deal?
    The biggest deal that I can see is “precedent”. If having made such a guarantee once, how can the Government refuse the same guarantee if another bank goes under? The biggest deal is for the Government to distance itself from this precedent; it cannot begin to underwrite £1 trillion in UK deposits.
    The “bad bank” with the remaining £55B worth of mortgages needs analysis. Why have these mortgages turned bad? Were they subprime, packaged in derivatives, sold to the UK as part of a default swap. I suspect so.
    This derivative garbage should be illegal. The UK and other EU countries should make it illegal as well as make it well known that the EU will not trade unregulated derivative or default swap stuff with the USA.

  • Comment number 55.

    Mackem_Man

    "The tories couldn't run a bath, let alone this country"

    New Labour have proved that they know how turn a bathtap on, but they (and we) found out they had no idea how to turn it off. Hence boom and bust, the funding of two wars, totally unregulated banks and the third worst level of debt to GDP in the world. And one million children living in poverty. Here, in Brown's Britain.

    All thanks to Gordon Brown, the worst Prime Minister in my 72 years since Anthony Eden. Time to call the removal men to Number Ten.


    MRAA2

  • Comment number 56.

    The removal of the NR guarantee is a step in the right direction, but I fear it is a first and last step.

    In order to have a safe, sustainable banking system we need to:

    1. Gradually reduce to zero the customer bailout guarantee
    2. Limit the role of the Bank of England as 'lender of last resort' to cover short-term liquidity problems, leading to.....
    3. Removal of the Bank's 'lender of last resort' role

    The measures could obviously not be introduced overnight, but the end result would mean higher reserves leading to safer banks, less risky but more competitive deposit-taking.

  • Comment number 57.

    majorroadaheadagain2, worse than Thatcher?

    She cost me 3 years of my life on the dole in the wastelands she created in the north east.

    Brown was not responsible for the global recession and the dark forces from where it came.

  • Comment number 58.

    Robert,

    "The least important is that the reconstructed nationalised bank - [b]with the bad bits taken out [b] - is well on the way to being privatised. "


    Ok, so I digress.......

    Would you call someone with 40% LTV, AAA credit rating, no other debt and on a .5x multiplier a bad risk?

    Then why was my account passed to NRK Asset Management?

    There is something fishy going on here.


  • Comment number 59.

    Mackem_Man

    I am sorry about your experience in the 1980s. But I suspect the true figure for people of working age who dont have a job now is closer to five million rather than the 2.4m official figure.

    I know that Thatcher inspired a mixture of emotions (from loathing to adoration, but on balance enough to win her three elections, not just on the back of toffs). Brown inspires only a feeling of abject dismay that he should be so totally ineffective. I don't want my Prime Minister to be ineffective, whichever party he or she belongs to. But Brown's wasteland is the whole country - a wasteland of obscene greed (watched over by a so-called socialist government) matched by a lack of despair over monstrous government debt, a total lack of control of legal or illegal immigration, funding of two wars, one of which, Iraq, is seen by most as undertaken on a lie, the lie over the Lisbon referendum, the total breakdown of trust in Parliament (which both Blair and Brown ignored for most of their thirteen years as an irritant) and a virtual siege mentality between the Blairites and the Brownites, which made the awful Major government look like paragons of virtue. And finally, as leading Labour people like Prescott ran around spouting off about Tory sleaze in 1996 and 1997 we have the spectre of the worst thirteen years of real sleaze we have ever seen from a Government. And people like Blair with his mansions and flats getting £160k per speaking engagement in the US. Almost as much as a PM gets for a year.

    Finally you say that Brown was not responsible for the global recession. That is what the man himself says, but it doesn't wash. Merkel and Sarkozy dont have the same problem that we have - in my view the state of the UK economy belongs squarely at the door of Mr Brown. After all, he can't have it both ways. For ten years he spouted out what a success he had made of our economy but the moment it all goes wrong he ducks out.

    We will have to agree to disagree, but in my view it is time for him to face the music.




    au

  • Comment number 60.

    54 - Bluesberry

    Corret, NR savers will have the same level of protection under the FSCS as savers at all other financial institutions (since, despire Mr Peston's imagination, the government has never implicitly or explicitly guaranteed more than that...), which is only fair. Also, existing guaranteed bond funds will remain under the same T&Cs of the product itself as currently.

    What isn't mentioned in the article is that the removal of the guarantee is one of the requirements for return to private sector for NR plc ("good bank"). With the guarantee in place, it cannot be sold & tax payer money cannot be repaid.

    Currently, the FSCS guarantee of £50K is only in place until the end of 2010. It was actually due to be removed in September 2009, but the government reviewed it and it was extended. The likelyhood is that come September this year, it will revert to £25K per customer per financial institution.

    Wouldn't be worth mentioning those two things though. Much better to insinuate that Northern Rock is doomed, this is a portentious sign etc, etc.

    No surprises that RP chooses this tone when talking about NR.

  • Comment number 61.

    Well major, like a fine claret your views of what Thatcher achieved seem to be improving with age, however the view from the North is things are better under Blair & Brown than it ever was under Thatcher.

    You seem not to mention lasting peace in Northern Ireland, the minimum wage, banning foxhunting, low inflation - I could go on but your in denial.

    We will have to agree to disagree.

    I wonder if Blair & Bush's actions had been repeated in the 30's and Germany dealt with like Iraq how many lives would have been saved?

    As for Tory sleaze, Aitken, Hamilton, Archer and Parkinson outsleaze the Labour party by virtue of their court records, and for some jail sentences - fact.

  • Comment number 62.

    The 100% guarantees are not free - they cost Northern Rock a fortune. It makes complete sense to remove these guarantees. Northern Rock has £19bn in Savings but only £10bn in mortgaes to fund. Do the the maths, it is now the the least risky bank out there by far.

    The so called 'bad assets' are now being run off in a separate company, therefore there is no risk to savers whatsoever.

    Even if half of the savers were to panic and takeout their money it would still be a very strong, well capitalized bank.

 

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