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All banks are safe

• Robert Peston
• 1 Dec 08, 04:15 PM

December 1 2008 is a historic day for British banking - because it's the day when the chancellor by his deeds (if not his words) made clear that he's providing 100% protection for all retail savings and deposits in British banks.

How so?

Well in normal times, savers in a small bank such as London Scottish would have been protected only up to the limit of the , which is 拢50,000 per saver.

London Scottish defines the notion of a marginal bank. It is a genuine tiddler, with deposits of just 拢273m, and is not by any stretch of the imagination a vital cog in the financial system.

In normal times, its collapse - which was - would not pose a serious threat to the banking system. And therefore the rule of caveat emptor would apply to those who chose to deposit their cash with it.

But these are not normal times.

The chancellor fears that if any saver were to lose out from the demise of London Scottish, that could prompt significant and damaging withdrawals of funds from other small banks and building societies.

To use the regulators' lingo, there would be contagion, possible runs at all but the very biggest financial institutions.

There are for example about 40 building societies with deposits of less than 拢1bn each.

So Alistair Darling has taken the extraordinary step of promising that no retail depositor in London Scottish will lose a bean, that all depositors will get all their money back, even if they've deposited more than 拢50,000 at the bank.

If savings in a bank as small as London Scottish are fully underwritten by the Treasury and the taxpayer, then in practice there is 100% taxpayer protection for all retail savings in British authorised banks.

Which begs the question why the chancellor doesn't simply acknowledge the reality and formalise this 100% guarantee.

That he hasn't made explicit that he's adopted a policy of total deposit insurance won't make life any easier for him, as and when some kind of normality and calm returns to the banking system.

The chancellor will, at some point, have to stand up and say that the 拢50,000 limit is a real limit. As and when that happens, there may well be a drain of funds out of small banks.

So surely it would be better to explain now why he's guaranteeing all banks' retail liabilities so that there's some coherence to any subsequent decision to withdraw the guarantee.

And if he were to guarantee the deposits in an explicit way, he might also be able to negotiate some kind of fee or reward for taxpayers from the bank beneficiaries.

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RBS, repossessions and recovery

• Robert Peston
• 1 Dec 08, 08:03 AM

Stephen Hester, the new chief executive of Royal Bank of Scotland, is perhaps showing unusual common sense for a banker.

On taking one of the hottest seats in corporate UK, he decided that his priority had to be to prevent his industry becoming public enemy number one - which is a genuine risk, since the excesses of his industry made quite a contribution to the economic mess we find ourselves in.

So it was his initiative - rather than an instruction by ministers - that Royal Bank will delay the start of proceedings to repossess the homes of those .

The owner of NatWest, which has about 7% of the housing market, announced late last night that it would postpone the beginning of the process to seize a residential property till the overstretched borrower is six months in arrears, twice the industry's "best-practice" trigger of three months.

And it informed ministers at 10pm, around the same time as it was briefing the media.

Which is not to say there's been no political pressure on Hester to do precisely this kind of thing. As of Friday, Royal Bank became 58% owned by the state - and the Treasury is desperate to prove that taxpayers are getting some kind of social return for the 拢20bn we've injected into this battered bank.

The point is that Hester saw the writing on the wall and didn't pretend that he couldn't read it - which would not be true of all his banking peers.

Here's the positive side of what Royal Bank has done: it gives those who lose their jobs in the looming wave of redundancies a better chance of getting a new source of income in time to prevent the bank seizing the family property.

But there is a cost, which will fall on estate agents and - possibly - anyone interested in seeing an end to the savage deflation of house prices.

How so?

Well, the disposal of repossessed property has become a vital source of income for many estate agents, at a time when property sales have collapsed by well over half and many agents are on the verge of collapse.

You may not weep for them, though you only have to look at your own high street to recognise quite how many thousands are employed by them (there are 10,000 members of the National Association of Estate Agents, so numbers on their payroll is a multiple of that).

Also there is a reason why delaying a great surge of repossessions may not be a good thing for anyone hoping for a recovery in the housing market.

The assorted surveys by banks and the Land Registry, together with anecdotal evidence, suggest that house prices are between 10 and 20% down from their peak - which, according to most forecasters, suggests that prices have another 15% to 20% to fall.

House prices are taking weeks and months to find a floor, that low-point from which recovery can begin, because many potential sellers are biding their time, hoping that something will turn up - while buyers are waiting for a crash that delivers bargains.

So the brutal truth is that a great downward whoosh in prices, the moment of catharsis, is most likely to come as and when there's a great surge in forced selling, which would be the consequence of a widely anticipated rise in repossessions.

But if all banks follow the lead of Royal Bank and add another three months to the schedule of seizing a home, well that's another three months to wait for the laws of supply and demand to exert their inevitable downward pressure on prices.

Which also means that there's another three months to wait for the crippling housing deflation to end - which also postpones a wider economic recovery, since the housing market is not hermetically sealed from the rest of the economy.

Doubtless the government will exert massive pressure on other banks to follow the example of Royal Bank, but they shouldn't kid themselves that interfering in the market brings no costs.

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