Does the state guarantee bank deposits?

Protocol said:
Marie,

it was Anglo Irish Bank, not AIB.

And it was 464 million, not 464 billion!!!!


€464m wiped off Anglo value after risk warning

SIMON CARSWELL
Fri, Mar 07, 2008
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Read and sent in haste so thank you for the correction. Yes, it was Anglo Irish Bank (the other A.I.B.) which has sustained a loss. I have some of my savings in Anglo, an amount over the compensation maximum) and wondered if the news is sufficiently serious to warrant withdrawing the excess.
 
The 90% limit at €20,000 is what is called co-insurance. It's used in the rather naïve belief that it will force unsophisticated depositors to monitor banks – as if the ordinary man in the street can call bank risk. It’s nonsense of course which is why the UK scheme will probably consider moving away from co-insurance to a 100% guarantee up to a limit of say Stg 50k.

The Irish scheme has reconstitution provisions which means the fund can be replenished through additional calls on banks should it become depleted. It does not appear to be an “absolute” state guarantee as it is not clear what would happen if banks could not replenish the fund. This is what is called “constructive ambiguity” which is a way of allowing governments some leeway in the event of a catastrophic failure.

Deposit insurance is designed to prevent runs. The intention is that depositors won’t take flight and run at the first sign of trouble. Of course when they fail government has to step in. AIB appeared to have benefited from the TBTF doctrine in the ICI case. It’s not at all certain what would happen if a smaller bank crisis emerged.

The credit union scheme is not deposit insurance. It is something altogether different. It provides no guarantee merely a statement that savers may be compensated up to €12,700 subject to the discretion of the ILCU.. It is what is termed a stabilisation fund where credit unions have clubbed together to provide discretionary assistance to a troubled credit union ie liquidity and solvency support. It is a finite fund without an ability to be replenished. It is administered by a sub-committee of the volunteer board of the ILCU and can be used even where a credit union has not or is not in compliance with membership conditions for what’s called “the good of the Movement”. It should not be confused with deposit insurance. Of course the problem with these little banks is the risk of a contagious run on many of them.

Kaplan
 
kaplan said:
AIB appeared to have benefited from the TBTF doctrine in the ICI case.
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Very clear explanation Kap, I think I was right in challenging the Boss on the interpretation of the respective sizes of the CU fund and the Deposit Scheme - completely different animals.

BTW, on a semantic point, the above quote should really read that ICI customers benefitted from TBTF. AIB were not bailed out, they were entitled to walk away from a limited liability company.
 
Marie,

to be clear, Anglo did not "suffer a loss".

It is a strongly profitable bank.

What happened was its share price fell, causing its market cap to fall.

This has no direct impact on its savings customers.
 
Thanks for that Protocol. It confirms Anglo's own statement. I have always been aware of the upper cut-off for compensation. The precedent of Northern Rock plus Brendan's comment about smaller institutions raised a brief concern which your response allayed.
 
Harchibald said:
On a semantic point, the above quote should really read that ICI customers benefitted from TBTF. AIB were not bailed out, they were entitled to walk away from a limited liability company.
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Harchibald

Very interesting archive articles here on AIB & ICI [broken link removed] here
[broken link removed] and here http://www.independent.ie/national-...llowed-disastrous-takeover-of-ici-316163.html

Seems the TBTF was triggered in favour of AIB as well as ICI.

Kaplan
 
kap, I think most of these articles are based on the premise that AIB was technically liable for ICI's losses. I doubt whether that was the case unless somehow it had gone guarantor. Interesting that the State had only recently sold ICI to AIB so one wonders just where the "moral" culpability lay.

Interesting archive articles though, these journos must cringe when they read their past comments like the Examiner stating that AIB was a certain take-over target - that was 6 years ago!
 
Deposit Insurance may have a wider remit than compensation in the event of a failure. It has two objectives. The first is stability : to remove the incentives for bank runs to develop; the second, consumer protection through compensating small depositors in the event of a failure. The critical overall objective is the strengthening of public confidence.

Deposit insurance sits alongside effective supervision and regulation which aims to limit the amount of risk incurred by banks to acceptable levels which counteracts the weakening of market discipline caused by the existence of a bank safety net (deposit insurance + lender of last resort).

DI schemes may provide for (a) compensation and (b) early stage intervention. In the latter case the aim is to step in and insist the bank take action to reduce risk. This is done with the threat that coverage will be withdrawn triggering regulatory withdrawal of authorisation to carry on business. Refusal to provide DI cover means a bank would have to close.

With credit unions it is recognised that an effective supervision and regulatory system does not exist. In addition there is no deposit insurance system and credit unions cannot access lender of last resort facilities. For these reasons many are concerned with the financial stability of the sector given the impaired state of its financial safety net provisions.

There is some anecdotal evidence of a loss of saver confidence in credit unions evidenced through consistent media stories of financial losses and regulatory investigations and intervention. The sector proposes a concentration of risks in which €14bn of household savings are exposed with 80% of savings concentrated in the top 100 credit unions and over €5bn in the top 50.

The soundness of the system needs to be underpinned by more effective supervision and regulation and deposit insurance (with both compensation and early stage intervention powers) bringing it into line with the banking system and credit union systems elsewhere.

The notion that a trade body such as the Irish Bankers Federation would ever provide deposit insurance would be unacceptable. Yet the government is attempting to broker such a deal with the ILCU at this time. In doing so it is exposed to a justifiable allegation of political capture of trade body self interests with all the known risks inherent in credit union trade body controlled private deposit insurance. Its position is relegating credit union savers to second class consumer status in recognition that they are not customers but “members”.

Somehow I doubt if the millions who save would consider themselves to be second class when it comes to their legitimate consumer protection expectations.
 
Could somebody please explain the Anglo irish IOM 100% capital security claim
on this page. [broken link removed]
So far this is the only bank that I have seen making this type of claim.

Thanks.
 
Fred, that's a fairly common statement. In fact Tracker Bonds are often described as Secure ever since IFSRA imposed a ban on calling them Guaranteed.

You will note that the Anglo IOM product is described as having a parent guarantee - ergo suggesting that everything about the bond including its interest and capital security is only as good as the company offering it or in its failure its parent.

In short, I don't think there is anything wrong with the description of this product.
 
Thanks Harchibald..

I have a deposit well over the protected amount and I must admit that the "100% guarantee" did sway my decision to a large extent.
I do realise that even now that the chances of a serious problem with my deposit and Anglo are remote but looking at the banks recent share price perhaps a little less remote than when I deposited last year..
It is a worry,I`ll admit.
Fred.
 
The Fed made what to me was an astonishing admission of the TBTF philosophy when it bailed out that Bear.

They said "maintaining financial stability is much more important than the risk of moral hazard".

Even the BoE in bailing out NR pretended it was only because it was solvent, suggesting that if, say, Barclays went insolvent that's tough luck. That's bull - Barclays would be bailed out even if insolvent otherwise the resulting financial instability would be a vista too appalling to contemplate.

So how far down the food chain do AAM contributors think the various Irish Banks are effectively underwritten by TBTF? Presumably the Big Two. But any more?
 
Harchibald said:
So how far down the food chain do AAM contributors think the various Irish Banks are effectively underwritten by TBTF? Presumably the Big Two. But any more?
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I don't think depositors in any bank would be allowed to lose money in this country. Shareholders are another story. People talk about the moral hazzard that the BOE and FED have created with their actions but remember that shareholders in both Bear Stearns and Nothern Rock have been practically wiped out which is the way it should be. Ask Mr. Lewis if he believes in TBTF!

Having said that, I work in the credit markets and as a senior bondholder in Bear Stearns I am laughing all the way to the bank and there is now an argument to load up on Goldman Sachs, Merill Lynch etc debt because the FED have admitted they won't let them enter bankruptcy and risk contagion with other banks because of the way that credit markets have developed. Thats where the moral hazard has been created. You would want to be a brace man though!!
 
Sunny said:
Having said that, I work in the credit markets and as a senior bondholder in Bear Stearns I am laughing all the way to the bank
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Sunny, would the value of those bonds have gone up?

A thought has occurred to me. Isn't Northern Rock a strange name for a bank? Is not Bear Stearns truly weird? The moral is avoid silly sounding names. Most of the deposit takers discussed in this forum have truly sensible and conservative monikers either using the words "bank" or "building society" or invoking the national dimension but one bank sticks out with a truly silly name...


Rabo
 

Well there are still hardly any bids on the street and still some doubt about everything but I had a 2009 Bear Stearns bond valued at 86 on Thursday. Similar JPMorgan bond was trading at around 99 so you can see the upside for bondholders if the takeover goes ahead and JPMorgan assume the debt.

You could be right about the names. You should publish a research piece!!
 
Can someone please explain to me how much of your saving on a deposit with say the BoI is guarantee by them.

Many thanks

Joody
 
BoI guarantees 100% of its customer’s deposits. The value of its guarantee or its worthiness is dependent on (a) its financial strength and stability and (b) the states financial safety net.

Most banks engage in what is called fractional reserve banking. At any one time they will retain only a small amount of customer deposits in cash, the rest they lend. They bet on an understanding that all depositors will not withdraw all their savings at any one time. Secondly as each loan is in turn deposited back into the banking system, banks lend multiples amounts of original deposits. Finally banks lending is constrained by their capital base – risk capital . “If I have a 10m in capital, I am permitted to lend €100m.”

Banking is a high risk business. Borrowing short and lending long. Most of the money on deposit (borrowed from customers and other banks) is withdrawable on demand or within a short time whereas most loans are repayable over much longer periods of time.

Governments realise that banks are both very important and risky. They respond in three ways. The first is to make sure that banks can pay out on demands for deposits and fund their loan books – this is called the lender of last resort function. The governments banker – called a central bank will lend money to banks to shore up their liquidity requirements. So if a bank is under cash flow pressure it can call on its (overdraft) line of credit with a central bank and access a supply of liquidity.

The second thing governments do is to regulate and supervise banks to control their risk taking. Banks are the most regulated of enterprises.

Thirdly governments recognise that things do go wrong which is why governments guarantees customer deposits with two aims : to underpin confidence and prevent runs from happening and to pay out should a bank goe bust.

Thus the value of a bank guarantee depends on (a) its financial strength and (b) governments willingness and ability to support it should it get into trouble; if it threatens failure, to arrange a rescue or if it fails compensate its savers. In other words the value of any guarantee is ultimately down to the full faith and guarantee of the state. The question then becomes what value is the states “guarantee” ?


Kaplan
 
kaplan said:
AIB appeared to have benefited from the TBTF doctrine in the ICI case.
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If we consider under which conditions bank mistakes have been in the past guaranteed by government; when I found the links below I did wonder if the fact AIB bank wrote off the debts of senior members of governments made it easier for those members of government to respond in like manner at the time for example with ICI. I could be wrong and I'm no expert about economics,politics or the timeline but to me it looks fishy...

[broken link removed]

[broken link removed]
 
Sorry my posting seems to have gone up of its own accord before I had a chance to complete it. If a couple have a joint account with a bank and then close it and open two accounts, is each of those accounts guaranteed up to 90% of 20,000? I would have thought so but one never knows.

Many thanks in advance
 
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