SAVERS with money in Landsbanki Guernsey will be devastated to learn that the island’s finance watchdog warned that the unthinkable might happen weeks ago.
As our page one story today reveals, Guernsey Financial Services Commission predicted that subsidiaries were at risk if a parent company, or fellow subsidiary, failed and were unable to repay its depositors back their money.
In short, what this means is that no matter how clean a bill of health an island operation may have, ‘upstreaming’ funds can lead to potential disaster, especially in the absence of a depositor potection scheme.
Where this leaves the hundreds of people facing real human tragedy in the wake of the fallout – including the scores who have contacted the Guernsey Press with their harrowing stories – still remains to be seen a week on.
The only thing they must feel sure of at the moment is that each of their personal nightnares were effectively predicted back in August.
Clearly the regulator was doing its job in raising the concerns. So why wasn’t something done?
While the wheels of decision-making can often move painfully slowly, sadly the onset of this global crisis didn’t. It seems the credit crunch and its impact on every aspect of the financial markets had little respect for meeting dates and consultation documents.
While these are extraordinary times and hindsight is a wonderful thing, no doubt angry savers will be asking what, if any, action was taken once the August consulation document was publised.
Could the island’s decision-makers have done anything at all to protect them and their investments?
Doubtless an answer will start to filter through. But maybe now is also the time to pose other questions, such as are other subsidiaries stopping ‘upstreaming’ their funds now?
While the intricate workings of the finance industry may remain a mystery to many people, one thing still seems staggeringly simple.
If experts warn of a a potentially disastrous situation affecting people’s money, why didn’t anyone tell the people?
Article posted on 13th October, 2008 - 2.44pm
16 Article Comments
Why didn’t anyone tell the people ? Are you serious ??
If the GSFC had put out a public statement, that the press would no doubt have plastered over the front page, everyone would have been queuing up to get their money out of the banks.Remember Northern Rock anyone ?
There isn’t a bank on the planet that has the cash to pay out if all its depositors want to withdraw their cash at the same time. That’s just how banks work - they use your money to make money, they don’t just put it under their mattress for safe keeping so that you don’t have to keep it under yours ….
Creating a run on the banks wouldn’t help anybody, and the States is in no position to bail out anyone - they can’t afford to maintain all our schools and provide all the healthcare we need, how on earth does anybody expect them to bail out banks ?
Perhaps that’s why they didn’t tell the people anything ……
Toby
Perhaps the heading should be “why didn’t they do more”
I appreciate your argument but the writing was on the wall months before the GFSC document of August 2008.
So, if the GFSC were aware of potential problems why did they fail to prevent the very happenings they were warning about?
This highlights the difference between regulation and supervision.
Nowadays it’s all regulated. There are boxes to tick and tests to pass and rules to obey. So long all of this passes the relevant test then everything is OK. You will probably find a rule against the GFSC telling people to shift their money fast (and I understand the reasons why this should be so)
In the long distant past, however, when supervision was the order of the day, the regulator only need to have a quiet word with the parent bank and tell them to shape up or ship out (while walking softly and carrying a big stick in case the parent ignored the warnings) and things might have been different. It would have all been done very quietly with no fuss and the subsididary would have been protected or forced to leave.
As it is, the Director General and his deputies, who are all on the various committees there, should, in the light of what has been revealed in the GEP today, consider their positions. It is the only way now that the public can ever have any faith in this organisation again.
Guernsey politicians might also spend some valuable time having a look at how little influence they have over the GFSC’s activities!
Isn’t “upstreaming” the only reason for the UK building societies to have been here in the first place ? Attract huge sums of deposits by offering them over-the-top interest rates and then upstream the funds to their UK parents to enable them to fund their onshore over-the-top Loan to Value mortgage books and Buy to Let lending books ? I doubt if any of the building societies would be here if they were not allowed to “upstream” the deposits.
John, what more could they have done? I have yet to hear or read anything by anyone to suggest what action could have been taken, by either the GFSC or the States, to prevent Landsbanki being put into administration.
A depositor protection scheme would merely mitigate people’s losses, it wouldn’t have stopped the bank going into administration.
Quite what people think Guernsey is supposed to have done to prevent the virtual collapse of the Icelandic economy, which is what ultimately caused the demise of Landsbanki, is beyond me …
Toby your comments are spot on. Of course it is totally understandable that anybody who has potentially lost money in Landsbanki is livid and highly critical of the system and of the regulator, but really the GFSC could do very little other than perhaps take more care over which banks are regulated to operate here in the first place. But in light of the recent events in the global banking market, even some top name banks have disappeared or been swallowed up and the only real difference with Landsbanki is that, unlike the UK, US, Germany, Holland etc., the tiny Icelandic government had no hope of bailing out its banks.
The level of “upstreaming” deposits has to be looked at very seriously because that’s very clearly an issue with weaker banks, but once a banking licence had been issued to Landsbanki by the GFSC the potential exposure was there if the Icelandic economy collapsed.
We have to look long and hard at which banks are allowed to operate in the island and ensure that we always have a guarantee in place for their liabilities to depositors which is actually worth the paper it is written on. If our number of regulated banks falls from 49 of mixed quality to a dozen very strong ones then so be it.
As always, there are lessons to be learned here and unfortunately the price of lessons have been very severe ones for several investors.
Hopefully, once the dust has settled, the depositors in Landsbanki will end up with their money back through the administration process, but if not then hopefully the States will find a way of funding a compensation scheme for those who have lost out. However, I cannot see how any compensation scheme could or should compensate anybody for losing more than the maximum that they would have been entitled to under an official depositors protection scheme, which might be less than £50k per personal accountholder. That would merely put failed depositors on the same footing as UK depositors under their comparable DPS.
The offshore banking landscape is clearly about to change for ever, and perhaps this is no bad thing. Thank goodness that our finance sector is as diversified as it is and is by no means dependent on the pure offshore banking sector.
If the States were advised by the regulator not to deposit there then they, as our elected representatives, should have informed the public. Guernsey is being run for the banks and not for the people.
It obviously suited the States to ignore the risks as the deposits rolled in. Now they are despised by those who will lose out.
Good politics? Good business? Failed on both counts.
Lawrence that’s not correct.
The States of Guernsey has got strict criteria about the credit ratings of the banks at which it can place its funds. Lessons were learned after the BCCI affair when, you will recall, funds were placed there by States Electricity. Government funds MUST meet that strict credit rating criteria and very many banks would not satisfy that criteria. Just because a bank does not meet that criteria (maybe rated AA or better) does not mean that it is not a suitable bank at which other depositors should place their funds.
There is a massive difference between a bank not being able to meet a Government’s own high minimum credit rating criteria and a bank not being deemed safe for any other depositors to use.
Tobyh
Bit dramatic to suggest that people seem to think that Guernsey could have stopped the collapse of the Icelandic economy. Can’t see where anyone has suggested that.
David puts forward a number of suggestions that could have been used, especially when the GFSC should have known how shaky the Icelandic banks were and of their downgrading earlier this year
I would expect a regulator of a bank whose standing is questionable to look carefully at the publicity used to entice depositors. This is usually one of the first things you look at. If they are making representations that can be misinterpreted, you stamp on it.
Then there is the matter of level of assets.
And so one could go on.
This bank collapse was not a surprise, at least not to many in the general financial world.
I would not be surprised if an outside observer would, after reading Toby’s response, wonder why bother with regulation, if when needed, it is so impotent
Regarding the claim by the GFSC that they gave a warning in August I would like to know where exactly in the document did they warn the public.The reality is that they didn’t warn at all in August and the only warning was in what was not said. I am aware that at least one of the people who read the consultative document highlighted the dangers of exactly what has happened in their response which they also copied to the Guernsey Press at the time. That person was quite happy for their views to be published in the Guernsey Press but did not want their name involved. It was not me but someone who has taken a serious interest in this issue. The Guernsey Press unfortunately did not publish those views, I think partly because then it did not want to publish anything which could be seen to put our financial regulation in a poor light. Since then, fortunately the Guernsey Press has seen that the policy of hiding our faults under a carpet has totally backfired and that those in authority responsible for that misjudged policy have to take the blame for Guernsey’s reputation having been tarnished
internationally.
There is no evidence that the GFSC raised any concerns to the Policy Council or senior politicians, and if they did, then your Editorial is right to question why nothing was done. But the facts are that the GFSC had no sense of urgency on this issue and indeed had effectively done nothing for 20 years since the collapse of Barnet Christie in 1987.
Looking at the Guernseyv Press and other media articles on depositer protection prior to and from August there is nothing to indicate that the GFSC was warning of a major problems but plenty to indicate there was no urgency as far as they were concerned.
The Editorial said that .. personal nightmares were effectively predicted back in August.. but this just is not true. If it was, and clearly nothing was done, then as one of your earlier commentators said, there should be some resignations.
Another previous editorial also was indicating a defence of the GFSC which argued that what happened with Landsbanki was not the regulators fault. Of course that is the case,they are not those who ran the bank. What is the regulator’s fault is their failures in licensing , monitoring and supervision, failures to protect the public and failures to protect the good name of our Island as a well managed and secure financial jurisdiction.
The question has been asked… well, what could have been done.. as if inaction and indeciveness are acceptable in a situation like this. What should have been done, is speedy resolute action, as happened in Jersey, because even though they knew the total in their rainy day funds would not be enough to cover a total bail out, they realised that it was their government showing it would do the maximum possible to maintain confidence in them which was important. All we have had from the those responsible in Guernsey and this includes the key politicians, has been completely see through excuses which make us look incapble and ineffective to the outside world. We have also seen the positive action taken by the UK government in respect of the general financial situation as well as Landsbanki. Why we didn’t act in a similar decisive way with Landsbanki Guernsey is another example of our community being let down.
We must end the policy we have had of pretending everything is rosy in our financial garden when it isn’t. We would get much more respect locally and nationally if we admitted and got on with getting out act together, and this includes sorting out a good eight other areas where we still need to bring financial services legislation to protect our public and more obviously now our reputation and actual survival.
Tony Webber
Seems that Mr Webber has read the situation well.
A fair account
David
I don’t doubt you for a second.
It just highlights that there is one rule for them and one rule for us.
Deposit banking should be run as a public utility. For the public. That means full disclosures on risk.
If gamblers want to take a risk then it should be clearly advertised that their funds are not being placed on deposit, rather they are being used in a global game of roulette.
Well said Lawrence. With this amount of risk, people may as well keep their money in their own safes at home with no interest but no risk of losing the lot to unscrupulous bankers.
Stephen John
What I am saying is that exceptional circumstances outside of the control of the local authorities caused the collapse of Landsbanki. It WAS regulated, and met all the criteria, and had done nothing against the rules. It was in fact surprisingly liquid - holding cash assets to meet about 2 thirds of its liabilities - how many other banks are in that good a situation ? We all have perfect hindsight now, but what regulatory changes do you think should have been made, and when exactly did the need for these changes become clear ?
If any public statement had been made about possible risks to people’s deposits, there would have been a run, and the bank would have collapsed anyway. And you can be sure that the people who got their money out first would have been the priviliged few, with the right contacts, leaving the small depositors, with all their life savings in the bank high and dry.
And the bank would have been left with little or no assets to pay them anything, unlike the 30-60% they look likely to get now …..
Going forward Guernsey needs to decide if these banks are in Guernsey as a vehicle to raise capital for its parent or there to act in the best interests of its depositors.
It seems that the GFSC should have put a brake on Landsbanki Guernsey upstreaming funds to Iceland as soon as it became aware of its problems - and the notice of the down grading in its rating should have been sufficient for this to happen.
Rules should be introduced now that state that only 40% of deposits can be upstreamed while the remaining 60% is invested in highly secure (AA or better?) instruments.
That would reduce the risk to the depositors and the protection scheme would also be better placed to bail any more failures.
The protection scheme must be funded by the banks in Guernsey but, in return,they should have a say in who is allowed to continue to offer banking services in Guernsey and who is allowed to set up in Guernsey in the future.
If the banks don’t like it then they can go - Bermuda seems to survive with just two banks ……..
Not at all T
Simply do your homework beore making deposits, Treat advertisements with care.Be suspicious of banks from small counties making daft assurances about covering losses, when just thinking about it would make you realise that places such as Icewland, simply wouldn’t have the @ackers to meet their vague, and in any case, legally unenforceable promises.
Then you could have chosen one or more of the alternative Guernsy banks to put yoour deposits.
At the end of the day those who can’t, won’t leave the money in the UK may well find Guernsy still is one of the best of the rest.