Luck of the Irish [Banks] Thursday, October 02, 2008
Image via WikipediaWalter Bagehot, Editor of the Economist for 17 years and son-in-law of its' founder, provided a most telling quote in his book, Lombard Street - A description of the money market, published in 1873.
"To lend a great deal, and yet not give the public confidence that you will lend sufficiently and effectually, is the worst of all policies"
He specifically criticised the Bank of England’s handling of earlier panics by responding “hesitatingly, reluctantly, and with misgiving.”
Whilst the UK Government has continued to tinker with deposit protection, indicating that it may raise the limit to £50,000, the Irish Government has provided an unlimited guarantee to underwrite its' own banks. The consequence of this has been evidence of a flight to "safety" with Irish banks benefiting from a flood of new deposits [the guarantee applies to GBP deposits by UK investors in Irish Bank branches in the UK].
Whilst the guarantee offered by the Irish Govt reportedly equates to EUR92,000 for every person in Ireland and would be devastating to Ireland if even one of the large banks collapsed, this measure has quickly restored confidence and hence dramatically reduced any likelihood of a bank run, thereby stablising the market.
In contrast, UK National Savings which is a Government savings institution has been deluged with new deposit applications. Likewise, the explicit Government guarantee resulting from ownership of Northern Rock has also prompted a rush of deposits to that institution to the extent that it has been forced to close certain of its' savings products to avoid breaching restrictions that were placed on its' market share [1.5%].
This distortion threatens the stability of the UK market - whilst it is inconceivable that the Government would allow any depositors to lose money in one of the large UK banks, especially in the current climate, the failure to explicitly state this simply prompts prudent savers to seek "safer" harbours.