100% deposit guarantee for Irish banks worries UK rivals
IN THE Whitehall of Sir Humphrey and James Hacker, it was quite normal. Politicians and their officials would spend hours pontificating about new initiatives in smoke-filled rooms alongside industry practitioners, or else embark on lengthy but pointless consultations before new policy measures were introduced. But in the era of Tony Blair, the cosier “sofa-style” decision-making was favoured.
At the height of a global financial crisis the likes of which the world has not seen since 1929, there is no room for such luxuries. Last Friday it seemed that, fresh from appointing unelected European commissioner Peter Mandelson to his Cabinet, Gordon Brown was finally waking up to this fact.
Once Congress had sunk US treasury secretary Hank Paulson’s first stab at a bail-out fund for dodgy US bank assets last Monday, the knock-on effects for banks around the world made themselves most strongly felt in Ireland.
The republic, still reeling from the ending of an unprecedented property investment binge, looked like it was in danger of seeing most, if not all, of its banks go down the tubes. Shares in Anglo-Irish Bank, probably Ireland’s most reckless bank, lost half their value in a single day, with similar falls among the other listed Irish banks.
The Irish, in true Celtic Tiger style, seized the day. After a marathon all-night session at the Dail, they ushered in a remarkably generous 100% guarantee on deposits held in Irish banks in the Emerald Isle. This is quite a gamble for the government of Taoiseach Brian Cowen.
After all, the Irish taxpayer is having to commit a potential €400 billion (£314bn) — more than twice the country’s GDP and nearly ten times its national debt — to Irish banks. Some might ask if this price is worth paying to keep Ireland’s six increasingly discredited banks alive.
When the plan was launched on Wednesday, it had an immediate effect on capital flows within Europe. In a silent revolution, UK depositors, increasingly fearful about the stability of their own banks, started transferring billions of pounds across the Irish Sea.
The Post Office, whose savings products are backed by the Bank of Ireland, also saw a surge in the number of customers seeking to invest. It may have been less photogenic, but this was a Northern Rock-style run by any other name.
Rather than sit on his hands or bite his already chewed fingernails and allow the drama to escalate into a crisis, as he and the tripartite authorities had done over Northern Rock, Gordon Brown acted.
On Friday, the Financial Services Authority raised the value of UK deposit insurance from £35,000 to £50,000. This meant abandoning a three-month “consultation” on how to improve the state guarantee. The steps were taken “in the interests of providing clarity”, said Hector Sants, the FSA’s chief executive.
Even though it is open to question whether an extra £15,000 of protection will be sufficient to allay depositor panic and slow the exodus of funds, it was at least a start.
Also on Friday, Mervyn King, the governor of the Bank of England, overcame his fears of “moral hazard” and chucked in a new loan programme that could be worth up to £280bn to Britain’s banks. Merv the Swerve now seems to be prepared to do whatever it takes to restore calm.
Other measures came in quick-fire succession. These included a revamp of the Cabinet and the launch of a new National Economic Council made up of 17 executives to advise the government. The council, led by Brown and the chancellor, Alistair Darling, will meet for the first time at 11am tomorrow and is scheduled to meet twice a week until the crisis subsides.
There are wider issues at play here. Brown last week slammed the Irish for taking unilateral action to address the crisis — and there is some resentment in Whitehall and among other European leaders about the nationalistic and protectionist overtones of Ireland’s bank rescue programme.
For example, overseas banks with operations Republic, such as RBS’s Ulster Bank and FirstActive units, and HBOS’s Irish operations, were furious these will not be entitled to a berth in the copper-bottomed lifeboat. It is also possible that the Irish will be required to scrap their safety net following a challenge from the European Commission which may rule it anti-competitive.
Even so, galvanised by the Irish move, it does seem that the UK government is now prepared to pull out all the stops to rescue the British banking system.
Darling intends to introduce a new banking regulation bill tomorrow and parliament will begin debating its contents a week later. Also, the FSA has announced that it too will consider further changes, including another increase in the compensation limit.
The possibility of a European solvency solution remains remote, and it seems that, despite yesterday’s emergency summit, French president Nicolas Sarkozy has quietly backtracked on such thinking. Instead, it seems like it is every country for itself — and a competition among European leaders to see who can be most munificent to their failed banks that is reminiscent of “beggar thy neighbour” protectionism.
One problem is that none of this is having much impact on the one thing that really matters: lending. In fact, credit market conditions are getting worse by the day.
This article was the main business comment in the Sunday Herald on 5 October 2008 (two days later, RBS / NatWest effectively collapsed)