Britain May Adopt Savers' Insurance
Britain's treasury chief wants a new, American-style guarantee to protect savers' money from bank collapse. This announcement came after the Bank of England lent £3 billion dollars to bail out Northern Rock, sparking panic among the bank’s customers.
Northern Rock is one of Britain's biggest mortgage lenders and may have received a major blow last year when the US sub-prime mortgage market collapsed. The government’s move is designed to protect UK depositors from losing their life savings if a bank collapses, and to see homeowners’ run into trouble with their mortgages.
In Canada, a bank must reserve $60 000 CDN, of each investor’s money. If the bank collapses, the depositor is guaranteed this money.
Treasury chief Alistair Darling told The Times that it is considering this style of deposit insurance, to protect customers' money. He did not offer a figure, but The Times quoted him as saying a £100,000 guarantee is a viable possibility.
The current regulations only protect the first £2,000 of bank customers' money. The next £33,000 is guaranteed for 90 percent of the total. Darling told The Times that those protections are inadequate.
The action to protect the money is designed to protect banks from customer insecurity which caused hundreds of Northern Rock customers to make a run on the bank and withdraw their money in the last week.
Analysts have suggested that Northern Rock did not predict a possible collapse, but just slashed their profit forecast. However, the run on the bank may cause problems that were easily avoided if customer’s money was protected.
One problem is the drop in Northern Rock’s stocks, which dove 30 per cent. The ripple effect is already being felt in the other major banks.
Finance minister Alistair Darling said the Bank of England is working "to create a stable banking system". First, consumers need to be reassured that their deposits and mortgages are safe from a collapse.
Published on September 30, 2007
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