A crisis unseen in modern times
As the global economic turmoil continues due to the American House of Representatives’ failure to agree on a £380bn bail-out of Wall Street, the British and Irish governments moved to instil customer confidence in their banking systems.
The Irish government’s pledge to guarantee 100% of deposits, bonds and debts in six banks and building societies for two years was a dramatic intervention by the state. With the Republic teetering on the edge of recession, it was probably a necessary move to shore up the country’s financial system. The tax-payer is now effectively going guarantor for the financial institutions which should make it easier for them to borrow money on the international markets and the trickle-down effect should enable more borrowing by home buyers and businesses.
By contrast Gordon Brown decided on more modest intervention, guaranteeing deposits in UK banks up to a maximum of £50,000. However, he made it clear that the Government to date had ensured that no customer had lost money in any of the re
cently troubled financial institutions such as Northern Rock, HBOS and Bradford and Bingley and he said that would be the case in the future if any financial institution got into difficulties. His is a more fire-fighting approach to the financial crisis, helping institutions which are facing crisis, rather than attempting to underwrite the entire banking system.
The concern of UK banks now is that the Irish banks have been given a competitive advantage. Not only will they have the state underwriting their borrowings, customers may also decide to switch savings to the Irish institutions on the understanding that they are safe no matter what the wider econom
ic climate. The last thing any bank needs at the moment is a run on its saving deposits. Once word spreads that savers are pulling out of an institution, confidence in that institution can plummet swiftly.
Northern Ireland’s customers have a variety of banking options open to them. First Trust, as part of the Allied Irish Group, and Bank of Ireland obviously benefit from the Irish government’s underwriting initiative, while the Ulster Bank is part of one of the world’s largest financial institutions, Royal Bank of Scotland, which is being safeguarded by Gordon Brown’s pledges. The Northern Bank is part of the Danske banking group, an institution which has one of the highest cred
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it ratings in world banking. Customers therefore should feel relatively well protected whichever bank they use. Northern Ireland’s customers are traditionally very loyal to their banks. Their hope now is that their loyalty will continue to be repaid.
Meanwhile in the United States, President Bush remains bullish that his bail out plan will eventually be passed by the House of Representatives which will not meet again until tomorrow. There is understandable resentment at having to hugely increase the government’s debt to bail out banks which are seen as victims of their own greed and incompetence. However the financial implications of refusing to do the deal are so grave — potentially a return to the Depression era which still sends shudders through the American psyche — that it seems inevitable that some agreement on shoring up the banks will be passed. These are uncharted financial waters for most people, even most governments, and it remains to be seen if the latest initiatives will restore a measure of calm or if more damaging reefs are about to be uncovered.