Protection comes at a high price

Tuesday 21st October 2008, 3:35PM BST.

ON FRIDAY, Opinion ran a letter from a well-placed insider making some cautionary points about the forthcoming proposals for Guernsey to introduce a bank-funded depositor protection scheme and the harm that the DPS could cause to the industry here.

In particular, the author felt that the cost of protection, falling as it would on the banks, could make doing business here unattractive and prompt a shift of institutions to other offshore jurisdictions where they already have a subsidiary.

In part, the Guernsey Financial Services Commission acknowledges those risks in its consultative document which it released in the summer.

The reason is the nature of the deposit-takers’ business here. Put simply, to make the money they take ‘work’, they pass it on or ‘upstream’ it to the parent bank and it is that volume of cash that makes having an offshore subsidiary worthwhile.

Yet is it also that very upstreaming that can place local banks at risk, as demonstrated by Northern Rock Guernsey and Landsbanki Guernsey. So any regulation designed to manage that has to avoid being so restrictive that it negates the value of having a subsidiary here.

That is why a savers’ protection scheme is so attractive – having it in place should the worst happen makes it easier for upstreaming to continue.

In terms of funding such a system, our insider complained that it was a bit much to ask competing banks to fund defaulters particularly since in the case of Landsbanki, most of those who would have to pay had done their homework and stopped lending to it several months earlier.

Even if a post-collapse bank-funded guarantee is the norm, it is still expensive. Under the GFSC’s own modelling, the fund would need to be in the order of £112m. with a first-year set-up cost of £86,000 and annual expenses of £44,000 thereafter.

To put that into context, the fund amount is equivalent to anywhere between 15-20% of the banking sector’s average profits, depending on the period selected. It is a high cost to restore Guernsey’s damaged reputation and for them to carry on doing business here.

Is it, as our insider asked, worth it?

View more: Financial Crisis news, Landsbanki news.

1
Tony Webber

October 21, 2008 at 5:01 pm

Your comment summarises the dilema well.
The problem is not just the fact that we have a dilema, but what responsibility have our authorities for it, and will continued indecisiveness make it worse.
It is all very well effectively saying that people should have known about the risks they were taking and it is their fault in some way. This viewpoint can be understood, but if we follow on from that it means that every type of investment with a Guernsey based financial institution has to be viewed with extreme caution, because bottom line is the authorities in Guernsey are going to say the equivalent of .. it was your fault for trusting us…
We surely have some responsibility for the operation of financial institutions regulated by our authorities and given permission to do business here. If we don’t, the phrase.. regulated by the Guernsey Financial Services Authority… will mean the opposite of that intended… and will mean insecurity and mistrust, not the image we want for our jurisdiction.
We also need to accept that if people put their money on deposit with Landsbanki Guernsey because of their promotional or advertising material, then surely that all had to be approved by the GFSC. If that is the case, how can we morally or legally just wash our hands of the plight of the depositers ?
It is said that the depositers’ protection scheme would cost certain estimated figures to set up and run. This, at the moment, is all supposition and seemily based on what the GFSC has said. Who knows what the correct figures are, and anyway, is the scheme being looked at the right one for us. It seems to be very narrow for only a bank funded scheme to be investigated, when this may not be the right way forward. Are we going to end up getting our knickers in a twist on this one ?
You were right, I believe to query whether the banking sector would want to continue their commitment to Guernsey if they were themselves saddled with a large potential burden.
Jersey had it spot on when they committed their rainy day fund to guarenteeing deposits, and thereby making it quite clear their government was going to maintain trust and confidence in their financial reputation, even if there was a possible high cost.
What our authorities in Guernsey seem to have lost sight of is they failed to see the publicity damage which would be done to our financial sector by not taking fast decisive action. They were too used to their own spin, and still they are not waking up to the fact that every day brings more and more damage in the national and international media to the reputation of Guernsey.
We always used to be told the value in hundreds of thousands of every piece of global publicity we obtained. Now, we are, for the first time, receiving negative publicity, and the detrimental value of that is collosal.
So when we add the costs of further damage to our economy, we have to consider that even taking late sensible action which might have cost implications in the short term, might be the only way forward for us.
Tony Webber

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2
Paul

October 22, 2008 at 4:59 am

Tony Webber

Absolutely bang on there.

It will be very nice reading this years stats and hearing the politicians squirming their way out of this one.

Probably be many more fact finding missions and business discussions in nice expensive places before they are finally booted out though.

It seems as though this island is obsessed with money but when it comes to looking after other peoples their COULDN’T CARE LESS ATTITUDE is waring thin. This is especially true with the investors.

Who is going to take the helm.

When this ends up on the rocks there will probably be an enuiry within the states.

What will be said is that it is not in the public interest to PUBLISH IT TO THE MEDIA THOUGH.

I can see the media about to flock in for the big scoop on this one.

Jerey has had enough bad publicity this year.

It seems to our authorities that, in their minds they are thinking, any publicity is better than none at all.

This island most definately can’t afford to buy time in the hope that something bigger will come along and shade this out.

Too many people are affected.

Damage has been done.

The only way forward now is for the people to offset that whatever the outcome.

If Jersey can why can’t we?

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