Thrifty Loans

The crisis at Northern Rock could lead to improved compensation for savers, but higher mortgage rates and lower savings rates.

When the crisis hit and savers panicked a couple of weeks ago it came to light that savers would only get the first £31,700 of their savings if a bank went bust. Chancellor of the Exchequer Alistair Darling said that he would like to guarantee up to £100,000 and is looking at the American scheme where $100,000 (around £49,000) is guaranteed by the government, and is paid out within days.

However, the British Bankers’ Association (BBA) has warned that such a move would be expensive for the industry and would have an impact on both borrowers and savers. The BBA agreed that there was a need for the existing scheme to be reviewed, but suggested that a period of reflection would take out the emotion and avoid knee-jerk reaction. A more expensive model would have an effect on rates.

The UK’s Financial Services Compensation Scheme (FSCS) is funded differently from the similar scheme in the US where it is funded by banks paying insurance premiums on their deposits. In the UK the FSCS takes money only from the industry, meaning that the fund is only worth £4.4 million. Conversely the US pot was worth $51.2bn (£25.3bn) at the end of June, built up from years of paying premiums.

Inevitably, if the UK scheme was run along the same lines as the US’s then borrowers’ mortgage rates would go up, and savers’ interest rates would go down.

The BBA said there was a need to look at the insolvency laws in the UK to see if money saved could be frozen speedily if a bank went under. In the current system savers have to wait (literally) in a queue at the same time as other creditors of the bank.

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