LONDON (AP) — The U.K.'s first run on a bank in almost a century has prompted the government to take a lead from the U.S. response to the Great Depression and promise laws that will guarantee savings should a bank collapse.
New laws will be introduced in Parliament next year to extend protections to bank depositors, though critics say it is a knee-jerk political decision that could incur significant insurance costs for banks, which will likely be passed on to customers.
The U.K. had already been considering a minor overhaul of its savings guarantee system when a global credit crisis sparked fear and long lines of depositors outside Northern Rock branches last month. Depositors rushed to the bank to make withdrawals when it was learned that Northern Rock had requested emergency funding from the U.K.'s central bank.
Depression-era images of panicked depositors making a run on the bank prompted a rapid and more extensive rethink.
The lack of guarantees for U.K. account holders, like those afforded under the U.S. Federal Deposit Insurance Corp., is one reason given for the run on Northern Rock, which had a ripple effect on consumer confidence across the nation.
U.K. customers are protected by the Financial Services Compensation Scheme, or FSCS, under which they received 100% of the first GBP2,000 pounds and 90% of the next GBP33,000. There exist no guarantees beyond that.
The government stepped in to guarantee all Northern Rock deposits up to GBP35,000 in September, then did the same for all banks to restore calm.
Compared with other European countries, the FSCS was generous - European Union nations are required to protect deposits up to just 90% of the first EUR20,000 - well short of U.S. guarantees.
The FDIC, created after the stock market crash of 1929, guarantees the first $100,000 in deposits. The FDIC also makes insured deposits available to customers of a failed bank within a few days, compared with several months in the U.K.
Bank of England Governor Mervyn King acknowledged to lawmakers in an analysis of what occurred at Northern Rock that it was "logical" for customers with more than the guaranteed amount make immediate withdrawals from the bank, while Financial Services Authority Chief Executive Hector Sants said that the fact investors were aware of the limitations of the FSCS had eroded confidence.
The run on Northern Rock lasted several days and images of snaking lines outside its branches across the U.K. were broadcast nationally. It ended only when the government stepped in.
Treasury chief Alistair Darling extended the FSCS protection across all banking institutions as the first step in wider reform of the system.
"We need to have a system in place that is clear and reassures depositors," he told lawmakers.
Critics say the likelihood that customers of a well-known bank would need to call on the FSCS to recoup their savings is minimal.
The Association of British Insurers said that a guarantee capped at GBP30,000 would be adequate to protect 98% of depositors because only 2% had more than that in their accounts.
"Anything beyond that could encourage reckless investing and be dangerous both for consumers and financial institutions," said ABI Director General Stephen Haddrill. "Increasing the limit beyond that risks distorting the market for savings and investment products."
Angela Knight of the British Bankers Association has also warned that higher compensation levels might mean higher charges for bank customers.
In the context of ongoing uncertainty about global liquidity levels, however, the issue has gained cross-party political appeal.
The main opposition Conservative Party has pledged to help the government pass any appropriate changes to the savings plan through Parliament.
The Treasury Office will consult banks and other interested parties until December, before unveiling a policy plan early next year.
