Friday, October 3, 2008

Bank Guarantees By Governments

With Irish government guaranteeing a certain sums of money deposited and other governments following suit, I am wondering what could be the long term impact. The British press has reported that depositors are already scrambling to move the excess amount (above the guarantee levels) from their accounts to safer locations.

Thinking ahead (pure imagination, of course)...

1) Governments can compete with each other to raise the guarantee levels to attract depositors.
2) Financial Institutes will go back to their old unregulated ways since there are guarantees in place.
3) Savers will open multiple accounts, each below the government guarantees. So governments end up guaranteeing the entire amount. So, now if banks fail, it will take down the entire country.

4) Given the credit crunch, each bank will start offering accounts at higher long term interest rate. At some point of time putting money in bank and letting it lie there will be more profitable. So money will flow from the stock markets to the bank. Exactly opposite of what is desired. Only the bank share prices will go up.

The above is one of the possible future based on very simplistic understanding of the issue. The future could be worse.

Note: The photograph used belongs to Jeinny Solis S. Please go here to see more such photographs.

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