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Big banking lessons from little Presbyterian Mutual

Investors at the Presbyterian Mutual Society are the only depositors in the UK likely to lose personal savings as a result of the banking crisis.

The organisation, which operated under an FSA exemption intended for credit unions in Northern Ireland, does not benefit from a Government guarantee scheme which protected savers' money and put an end to the run on Northern Rock.

When customers attempted to withdraw £50m during the height of the banking crisis in October 2008, the PMS paid out £21m before entering administration in order to safeguard its remaining reserves, which totalled, by that stage, just £4m.

As the Northern Ireland Executive and the Government at Westminster wrangle over responsibility for the crisis, a charity and pressure group, formed to promote the principles of honest money, has formulated a plan which could refund the society's savers, without necessitating a bailout at public expense.

The Cobden Centre, spearheaded by seafood entrepreneur Toby Baxendale, is keen to see the Bank of England issue new notes and coins to PMS investors who currently cannot access their money. Any inflationary effect would be mitigated by erasing deposits and allowing the Government to recover the society's investments, to set against the national debt.

So far, the First Minister and deputy First Minister have indicated that they envisage three possible ways out of the Presbyterian Mutual's predicament.

They would prefer a commercial buyer for the society to emerge, underwriting deposits which are currently frozen.

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A 'Northern Ireland solution' has been mooted, but it is an ironic label, because it can only take place if the Treasury provides a bailout.

Finally, the least satisfactory option would set up a hardship fund in order to alleviate the worst effects of the collapse and compensate the most needy investors. The Cobden Centre is proposing a fourth option, injecting imagination into a debate which has become focussed on passing the buck.

A recent report by the Treasury Select Committee suggested that the Executive should bear responsibility for failing to identify a regulatory loophole which rendered the PMS vulnerable.

It drew a predictable response from Peter Robinson and Arlene Foster, whose department Westminster accuses of being asleep at the wheel.

Presbyterian Mutual customers are less interested in apportioning blame than in recovering their hard-earned money. After all, even savers with the collapsed Icelandic banks were eventually refunded from the public purse.

On the Cobden Centre website, Baxendale argues that the Bank of England can print money to cover PMS savings, without creating excess inflation.

Instead, the Mutual's deposit books could simply be wiped clean and loans which it made to property developers and buy-to-let entrepreneurs could be recovered by the Treasury.

Although the society operated under an exemption from the FSA, by the time of its demise, it engaged in investment activities similar to those which precipitated the banking crisis in the rest of Britain. Therefore, when investors began to withdraw cash, with confidence plummeting, the PMS's reserves became dangerously depleted.

The Cobden Centre believes that the Presbyterian Mutual offers a lesson for the entire financial sector in the UK. It is pressing for legislation which would require banks and building societies to hold more of their deposits in reserve. Depositors should have a greater say on the level of risk to which their savings are subjected.

Of course, interest rates would be adjusted accordingly but, the centre insists, it is the customer who must decide whether his/her money should be kept safe in a vault.

The current regulations encourage a 'credit overhang' with only a fraction of savers' money available to a bank or building society at any given time.

When the PMS went under, it had £5m cash against £310m deposits which could, by the society's own rules, be requested on demand.

Northern Rock, the Royal Bank of Scotland and other institutions operated with similar imbalances, but they were deemed 'too big' to fail. It is not difficult to understand, given the sums involved, how the panic which engulfed PMS savers had such calamitous consequences.

Ultimately, because of its size, the Presbyterian Mutual is a relatively minor casualty of the financial crisis and the effects of its collapse have been confined to a small region of the United Kingdom. However, it offers some universal banking lessons and the plight of its hard working savers should not be ignored.

The Cobden Centre proposals offer a short-term solution for the society's investors and its analysis forms a useful critique of where Britain's banks went wrong.

Owen Polley is a unionist blogger and political commentator

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