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An overdue shift in attitudes?

3 April 2013

John Kay (Financial Times, 3 April) is perfectly correct to note that banks must be better capitalised and that those that aren’t must be allowed to be resolved without protecting investors. The question posed by Jeroen Dijsselbloem however is specifically whether uninsured depositors should be included among those investors. And the Government has posed a further question in clause 9 of the Banking Reform bill currently before parliament which proposes not merely to bail in such depositors, but to subordinate them in a winding up to the claims of the FSCS (i.e. other banks) – thus greatly reducing their recovery rate in a winding up. It is now clear that the shift in attitude Mr Kay welcomes is that medium-sized depositors are now fair game.

The taxpayer has no interest in protecting bankers’ excessive bonuses, nor the equity shareholders or investors in subordinated bonds or other exotic instruments who have been adequately remunerated for taking bank risk. But we change at our peril the understanding governing larger bank deposits which until very recently everyone has expected to be paid in full. It is obviously unfair to do so in relation to fixed term deposits taken out before the legislation is passed. But it is counterproductive to make it impossible for the public and businesses to use banks for any transaction exceeding £85,000. Think what such a development would do for economic growth, or for London’s ability to compete internationally in financial services. The taxpayer would lose more through such an ill-considered approach.

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