[BBC News] Manx savings protection reviewed

[Newsbot]

The Isle of Man government reviews its level of protection for savings amidst the global financial crisis.

 

Source : http://news.bbc.co.uk/go/rss/-/1/hi/world/...man/7648916.stm

[Albert Tatlock]

I bet it'll increase from £15K, to £15K and a kipper.

 

Has to move to £50K surely? Trouble is though we've had a bank go pop here before, so how much could it potentially cost joe taxpayer here? We've got all sorts of diverse banks here. I think we should wait a good few weeks to see what happens after this money gets thrown into the banks.

[Mutley]

I bet it'll increase from £15K, to £15K and a kipper.

 

Has to move to £50K surely? Trouble is though we've had a bank go pop here before, so how much could it potentially cost joe taxpayer here? We've got all sorts of diverse banks here. I think we should wait a good few weeks to see what happens after this money gets thrown into the banks.

 

It's irrelevant whether it's £15k or £150k because of the way that the compensation scheme works in the IOM. By the time you got any money (if at all) it would have devalued to a fraction of it's original value.

[pongo]

It's irrelevant whether it's £15k or £150k because of the way that the compensation scheme works in the IOM. By the time you got any money (if at all) it would have devalued to a fraction of it's original value.

 

Well then presumably that will have to be part of what they will need to change as they move forward. If there is an issue. It has to be credible or else there will not be much reason for people to deposit their savings / earnings here. They know that.

[oldmanxfella]

It's irrelevant whether it's £15k or £150k because of the way that the compensation scheme works in the IOM. By the time you got any money (if at all) it would have devalued to a fraction of it's original value.

 

Well then presumably that will have to be part of what they will need to change as they move forward. If there is an issue. It has to be credible or else there will not be much reason for people to deposit their savings / earnings here. They know that.

 

They can't do much other than attempt to force the UK owners of the Manx banks to re capitalise them to provide a bigger cash buffer (or forcing them to retain more cash here rather than lending it straight back to the UK company) which obviously won't happen in this environment. The scheme is paid for by a levy, and if the Manx banks can't afford to pay a bigger levy the argument about raising compensation levels is totally academic. Nothing will happen unless IOMG wants to put its own money up, and I can't see that happening either.

[manshimajin]

It's irrelevant whether it's £15k or £150k because of the way that the compensation scheme works in the IOM. By the time you got any money (if at all) it would have devalued to a fraction of it's original value.

 

Well then presumably that will have to be part of what they will need to change as they move forward. If there is an issue. It has to be credible or else there will not be much reason for people to deposit their savings / earnings here. They know that.

 

They can't do much other than attempt to force the UK owners of the Manx banks to re capitalise them to provide a bigger cash buffer, which obviously won't happen in this environment. The scheme is paid for by a levy, and if the Manx banks can't afford to pay a bigger levy the argument about raising compensation levels is totally academic. Nothing will happen unless IOMG wants to put its own money up, and I can't see that happening either.

They could offer the UK banks shares in the MEA as security for extra capital.

 

"Under The Mattress Bank" remains attractive - no guarantees but quick access to cash and no charges or advertising to pay for. At this stage the low interest rate on offer reflects the higher levels of security on deposits (cash ones that is). The management team is trustworthy too - personally known to the depositor.

[Rab]

It's irrelevant whether it's £15k or £150k because of the way that the compensation scheme works in the IOM. By the time you got any money (if at all) it would have devalued to a fraction of it's original value.

 

I think a lot of local depositors do not realise this. It is completely different than the UK scheme. You would not automatically get your money back. You would have to go through quite a complicated process of claiming your money, and wait until there was enough in the pot (Funded by other banks, not the Government!) to get any return. This would be limited to 75% of the deposit, up to a maximum compensation of £15,000. You would not get interest on the money, and it could take many years. What kind of a protection scheme is this? Not enough of a scheme for me to leave any money in Manx banks, that is for sure.

 

I guess the Manx Government is under pressure from local banks to do something more, but surely our Government do not have the funds to guarantee such amounts. It would be nice for them to make some kind of a statement though. As usual, they are just burying their heads in the sand. This does nothing for the public confidence in Manx banks.

 

I wonder how much money has poured out of local banks and into National Savings & Investments over the last few weeks?

 

Rab

[thesultanofsheight]

I guess the Manx Government is under pressure from local banks to do something more, but surely our Government do not have the funds to guarantee such amounts.

 

They should follow the Irish lead. There's about £50 billion in local deposits - Alan Bell should just promise to guarantee the whole bloody lot and then try not to smirk or uncross his fingers in front of the cameras. In for a penny in for a pound!

[manshimajin]

I think a lot of local depositors do not realise this. It is completely different than the UK scheme.... You would not get interest on the money, and it could take many years. What kind of a protection scheme is this? Not enough of a scheme for me to leave any money in Manx banks, that is for sure.

 

I guess the Manx Government is under pressure from local banks to do something more, but surely our Government do not have the funds to guarantee such amounts. It would be nice for them to make some kind of a statement though. As usual, they are just burying their heads in the sand. This does nothing for the public confidence in Manx banks.

 

Rab

Is the fundamental fallback position for the IOM Government to cross their fingers, pray and hope that the likes of HSBC and RBS will not want headlines flashed around the world saying for example "HSBC In IOM Unable to Pay Depositors"? In the present nervous environment such news would travel like lightning and destabilise the 'global' bank involved.

 

Suspect the really big issue here is what this all means to the future of offshore financial services over the next 5-10 years and the ability to borrow money on the Island for business development and home ownership.

 

In extremis the Government could volunteer to become part of Lancashire - if they'd have us!

[oldmanxfella]

Is the fundamental fallback position for the IOM Government to cross their fingers, pray and hope that the likes of HSBC and RBS will not want headlines flashed around the world

 

To be fair finger crossing is what most other governments are doing. Realistically the IOM is in a very tricky position - its now gone out and said its reconsidering the DCS compensation levels. That headline has now been picked up off Island. Now currently there might be people out there who are not worried about the safety of their deposits - but the minute you advertise your thinking about increasing the scheme, and worse the minute you subsequently advertise that your not in a position to do anything about it (or you can't match the UK) is the very minute that the electronic transfers start flying.

 

This is all about confidence and I really don't think saying that your just thinking about it is sensible in this environment, as the first sign of weakness will mean that deposits will be pulled. I'm not being critical here as like every other government they don't have much option.

 

In my mind the best option is for IOMG to highlight its position to those that matter in the UK - namely it has £50bn of deposits here that have been lent out to the UK banking parents from the IOM businesses. If that starts to go because of concerns about stability they are screwed because its the UK businesses that will generally have to provide the funds to meet any redemptions.

 

The risk to the UK is that if the position of the IOM is not underwritten externally the £50bn that could be transferred out of here by concerned depositors (and the £100bn in Jersey) can only be raised from the UK parents passing the money back to meet redemptions so the offshore centres pose a big risk of capital flight for the UK banking system.

 

I'd say the options are political and not related to pumping up our own DCS - its explaining what offshore banking raises for the UK banks and what the risks to the UK system are.

[Mutley]

Is the fundamental fallback position for the IOM Government to cross their fingers, pray and hope

 

 

They're world leaders at this...

[Mr Woo]

You would not get interest on the money, and it could take many years.

 

It's worse than that, for some reason that I was unable to understand, even after phoning the FSC, it appears that we would be charged interest on any claim.

 

Have a look on their website, it appears thus:

 

"In order to claim compensation you will have to assign your rights to the whole deposit to the DCS manager and you will be charged interest on the amount of your claim."

 

I really don't understand the reasoning behind this and she was unable to explain, she did however confirm that it was the case and not just some typographical error.

 

Anyone?

[manshimajin]

To be fair finger crossing is what most other governments are doing. Realistically the IOM is in a very tricky position - its now gone out and said its reconsidering the DCS compensation levels. That headline has now been picked up off Island. Now currently there might be people out there who are not worried about the safety of their deposits - but the minute you advertise your thinking about increasing the scheme, and worse the minute you subsequently advertise that your not in a position to do anything about it (or you can't match the UK) is the very minute that the electronic transfers start flying.

 

This is all about confidence and I really don't think saying that your just thinking about it is sensible in this environment, as the first sign of weakness will mean that deposits will be pulled. I'm not being critical here as like every other government they don't have much option.

Excellent point and a tricky road for the politicians to follow. Catch 22. They can't lie low once questions are asked. But answering exposes the limitations of the DCS and probably raises as many (at least) worries as it resolves.

 

Not only are there dangers of capital flight to better guarantee legislatures, but also dangers of capital drought. If bank inflows dry up interest rates will have to increase substantially to reflect the true 'risk premium' - and therefore so will borrowing costs. Alternatively banks liquidity fails....I don't want to go there.

 

It really is a confidence thing. Unfortunately the banks, through the use of financial instruments that they do not seem to have understood, have put themselves into a position where this is a dwindling commodity unless they are given almost open-ended promises of taxpayer support.

 

Suspect that as always it will be the footsoldiers who will end up with the most pain through the wider economic impacts of what is happening.

[Skeddan]

In my mind the best option is for IOMG to highlight its position to those that matter in the UK - namely it has £50bn of deposits here that have been lent out to the UK banking parents from the IOM businesses. If that starts to go because of concerns about stability they are screwed because its the UK businesses that will generally have to provide the funds to meet any redemptions.

 

The risk to the UK is that if the position of the IOM is not underwritten externally the £50bn that could be transferred out of here by concerned depositors (and the £100bn in Jersey) can only be raised from the UK parents passing the money back to meet redemptions so the offshore centres pose a big risk of capital flight for the UK banking system.

 

I'd say the options are political and not related to pumping up our own DCS - its explaining what offshore banking raises for the UK banks and what the risks to the UK system are.

oldmanxfella - you raise extremely interesting points and clearly have good insight and knowledge on these issues. I get the feeling that you are hinting at what the options might be, but refrain from spelling these out. Given everything else you say, I'd be really interested to hear your thoughts on those options. Having no more than man-in-the-street understanding of finance, I can only guess at what you mean by "the options are political and not related to pumping up our own DCS".

 

Given the £50bn in IoM (out of £54bn total deposits in IoM?) and £100bn in JE held in UK subsidiaries which has gone to UK parents, I'd guess that this topic might have come up at recent BIC meeting which I understand focussed on finance. I'd have thought the option which you may be hinting at would be a 'softly softly' approach, with UK extending Deposit Protection Scheme to cover deposits in overseas subsidiaries - something which is politically easier to swallow given latest Irish DPS initiative and which would be in UK interest given domino effect you note.

 

Working the other way round, I gather about 3 million UK residents have deposits in offshore accounts totalling approx £180bn - an average of £60,000 each. Given financial advantages - higher interest, tax on interest deferred until repatriated, many of the larger deposits - e.g. over £30K may go offshore. Hazarding a guess, perhaps £50bn of the £54bn of deposits held in IoM is from UK residents deposited in IoM subsidiaries through UK parents.

 

So I'm wondering if maybe (?) the UK raising protection to £50,000 and change in scheme might be partly to do with extending scheme to offshores - which would indeed seem to make sense for the UK. Given 3m UK residents with £180bn deposited offshore, I don't think the UK could afford not to do this - not doing so may not be an option - politically or economically.

 

Forgive my ignorance, but I'd have thought the best option for IoM might be to not protect offshore deposits in subsidiaries of overseas banks not protected by a DPS - don't blink, but leave it to them. However it could make sense for all concerned for IoM to offer 75% 'interim' DCS protection for offshore accounts protected by an overseas DPS even up to £50K, with benefit of depositors recovering this quickly rather than maybe waiting years under UK and Irish schemes. IoM could take position of depositors and recovering in due course from the UK or other DPS, and depositors receiving any amounts remaining beyond the 75% already recovered later on down the track. I'd think depositors are as almost as concerned about being able to release retirement savings etc. when needed as they are about having the savings protected. 75% in the hand and any remaining later is better than 100% (less interest, FSCS fees etc.) in the very very long term and having to scrape by until then.

 

If UK doesn't pull finger and extend protection offshore, perhaps IoM should explain that having IoM protect and shore up the UK economy is not the only other option. IoM could even explain the very drastic alternative measure of 'pull the rug' i.e. limiting IoM's DCS exposure by no longer giving more than interim protection of such offshore deposits in IoM. In effect this would mean no protection for deposits not covered by UK DPS in UK subsidiaries (other than for IoM residents).

 

If £50bn is from UK residents, this probably wouldn't fly to the UK as this would incur tax liability - if anything this would now probably go to Irish banks instead - albeit causing some strain on UK parents. This needn't be 'mutually assured destruction' for both IoM and UK; perhaps Irish govt and banks would line up to buy up IoM subsidiaries from UK banks who'd be struggling otherwise, and step into shoes, and thereby cover these deposits in IoM under Irish DPS. However I doubt the 'people who matter' in the UK would let it come to that. i.e. time for UK to shit or get off the pot - it might relieve the UK's constipation on the issue and not leave IoM carrying the can or remain hanging in the wind.

 

Net effect if force UK's hand to extend DPS to offshores (coupled with IoM providing 'interim protection' under DCS) could be good for all concerned - it seems like a classic prisoners dilemma situation. IoM stating it is reviewing its DCS may well inadvertently send out the wrong signals - or following on heels of BIC summit may indicate something else (?). A clear statement about protection of offshore deposits is needed from the UK - it's no time to be sitting on the fence or shying away from making decisive clear announcements about offshore deposits which may be unpopular with joe public in the UK.

 

I freely admit to knowing next to nothing about this field and can only very naively guess what the possible 'political options' might be, and those are very probably bunk. I think you are dead right in what you say, and given your insights, would very much like to hear the kind of political options and DCS/DPS arrangements that you have in mind.

[Rab]

It's worse than that, for some reason that I was unable to understand, even after phoning the FSC, it appears that we would be charged interest on any claim.

 

Have a look on their website, it appears thus:

 

"In order to claim compensation you will have to assign your rights to the whole deposit to the DCS manager and you will be charged interest on the amount of your claim."

 

Bloody hell! How can they charge you interest on your money? Surely that is a mistake?

 

It wouldn't surpise me though if this was right. It would probably end up that actually you receive an invoice from them, for interest owed for your 10k over 15yrs. Interesting...

 

Rab