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.
An exclusive report from The Right Side
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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