Denis Cooper in today's FT:
Sir, It is reported that the Irish government will demand up to €2bn to guarantee potentially €500bn of bank deposits over the next two years, an annual charge of 0.2 per cent. On the other hand, the banks are pressing for a charge of only 0.1 per cent a year.
Perhaps banks would prefer to seek commercial insurance. It would certainly be interesting to see what premium rates were offered by insurance companies once they had examined the books of each bank in detail and assessed the risk. Indeed, would this not be a better mechanism for providing ordinary savers with an ongoing guarantee that all money on deposit would be 100 per cent safe?
Change the law so that licensed retail deposit-takers must take out insurance with two or more approved but competing companies to cover the total money in all personal savings accounts; and insist premium rates are frequently adjusted to reflect changes in risk, and widely publicised. The saver would have an indication of which institutions were pursuing riskier business models and could choose to avoid them; the taxpayer would never be called on to bail out the saver - except, of course, in the last resort, if one of the insurance companies failed.
Dr D R Cooper, Maidenhead, Berks.
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3 comments:
Hey. I like!
I support this.
Consider something that all drivers need: 3rd party insurance for their car. The insurance companies charge people based on the risks. If you're 18 years old and want to drive a Porsche, you're going to pay a lot more than a 60 year old guy with a Volvo.
So, why should we cover the likes of Crock and B&B like we cover Nationwide, despite Nationwide running a lot lower risk operation.
Insurance would have also have had the beneficial side effect of not inflating the housing market so much. The more crazy loans or the heavy use of wholesale markets would have cost banks more in insurance, and deterred such lending.
You can't trust government on this (of either persuasion). They always love the bullshit wealth of higher house prices so will not assess the risk in the way that someone with a financial interest will.
On a more arcane point, why not wrap up the insurance element as part of the terms on which money is raised in the first place (via bonds, mortgage backed securities, money markets etc)?
If part of the deal is that bondholders lose xp in the £1 for every £1 million that the bank has to write down mortgage advances, then the whole problem is fixed, there's no need to pay insurance companies; the implied insurance premium will just be added to the interest rate paid on the bonds. It's called matching up risk-and-reward, and it is also deadly simple (for I am a simplification campaigner!)
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