Why Ireland’s banking bail-out could be good news for British savers

Forget about Washington DC The biggest news – for British banks and savers alike – didn’t come from on top of Capitol Hill last night. It came from Dublin, and the Irish Government.

In what was hailed by one broker as “a massive step to alleviate financial stress in the domestic system”, the Irish government agreed to cover all the deposits and most of the debt held by six of the country’s banks for the next two years.

In other words, if one of the country’s banks has serious problems, the Irish government will step in. At €500 billion, more than twice Irish GDP, this isn’t a cheap move. But it does have enormous ramifications for the British banking sector.

First of all, it puts Irish banks at a distinct competitive advantage to their British counterparts. After all, why keep your money in a British bank account where just £35,000 of your money is protect, under the Financial Services Compensation Scheme, when you can shift it to the British branch of an Irish bank and receive 100% protection? As Eamon Hughes, head of research with Goodbody Stockbrokers, wrote in a note, “this presumably puts the Irish banks in better shape to seek funding compared with other non-guaranteed banks in international capital markets.”

Hughes doesn’t just mean in terms of deposits. He is also talking about attracting the funds from other banks, especially Asian banks. Western banks are having a hard time attracting funds from the interbank lending market, because those with money are afraid of giving it to another party, in case it goes bust. Getting shored up by the Irish government now means that Irish banks look like a far more attractive proposition to prospective lenders.

Which brings us to the second point. If British banks are now at an enormous competitive disadvantage, is it not time that Gordon Brown and Alistair Darling did the same thing here by raising the UK’s deposit protection limit from the now rather stingy-looking £35,000. Given that they’ve shown they have no intention of allowing any depositors to lose out – the nationalisations of Northern Rock and Bradford & Bingley have seen to that – they’d have nothing to lose. And it might just deliver a much-needed burst of confidence to the sector.


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