The Safety of Bank Deposits
With news of banks facing bankruptcy across Europe, these are nervous times.
There are few things that financial authorities and governments fear more than a rush to withdraw savings from banks. It evokes memories of the Great Depression, and in Germany the hyper inflation which made money worthless, facilitating the rise of the Nazis.
In the UK, the government explicitly guarantee the first £50,000 of savings in a bank account (having recently increased it from £35,000. In practise, the government would not want to let any bank go bankrupt for the negative impact on confidence. However, there is a reluctance to explicitly guarantee all savings because this encourages banks to engage in risky behaviour, because the government will always secured savings should banks go bankrupt.
The problem is that now Ireland and Germany have abolished an upper ceiling on bank deposits, it creates an incentive for savers to move their savings to Germany and Ireland where they can have 100% security. If there was a widespread withdrawal from British banks, it would be very damaging. At the moment, banks are desperate for more savings to improve their battered balance sheets.
Therefore, to prevent a flow of savings from the UK to Ireland and / or Germany, Gordon Brown is under pressure to abolish the limit on savings. This would mean the UK government promising to honour upto £2 trillion worth of deposits. It’s a difficult choice, and no wonder they are not happy with the Germans and Irish for raising the stakes of securing bank deposits.
Original post by Tejvan R Pettinger