Saturday, June 13, 2009

Compensation versus Restoration 100%

The Depositors' Compensation Scheme [DCS] is a stautory provision made by the IoM government to provide a means of compensating depositors up to £50,000 in the (at the time) unlikely event of a bank going bust. In effect it means that anything over £50,000 deposited is 'at risk' of being lost in the event of there being no recoverable assets in liquidation.

In the face of the global financial crisis & the collapse of KSFIOM the Financial Supervision Commission [FSC] is now at pains to emphasise this point. Banks must not only do the same but explain the timeframe that depositors might expect to have their money restored to them in the event of a claim having to be made.

The IoM FSC is implementing the DCS as though it had no responsibility for the reason why it is having to do so, namely its own regulatory failure to protect depositors' money in the first place.

To implement the DCS the government is having to borrow the money to meet its statutory obligations. However, in respect of the Kaupthing bank the government will recover what it borrowed from the liquidator as the assets are realised. No doubt in addition it will seek to recover the costs of the whole process, so that those depositors with over £50,000 at stake will lose out a percentage of the bank's recovered assets.

Now the big question is why the government doesn't have any regard to the special circumstances in which KSFIOM lost its licence, and make special provision for all depositors to have their money returned 100%. The DAG asserts firmly & rightly that it should. But the IoM government choses to behave as though it has no moral obligation to make provision for this to happen.

Quite simply, as the government doesn't have a bank of last resort (it should), it could elect to borrow the money from the 20 banks on the island & repay the loan from the recovered assets of the bank. It is borrowing money from the banks anyway to implement the DCS, so why doesn't it borrow the extra to repay depositors 100%?

It choses not to because resolving the KSFIOM debacle only requires it to fall back on the bottom line provision of its statutory DCS. That is what Tony Brown, Chief Minister, told the Treasury Select Committee on 3 February 2009.

Don't even think about it being 'fair', 'right' or 'just'. Those words are not in the vocabulary of governments. It's what the law says that counts.

100% return is now only possible if the government finds itself under enormous pressure to change its stance and order the Treasury to come up with a plan that meets the demands of the DAG. That pressure will not come about from any sudden sense of 'fair play' or the need for 'justice' to be done, but from a serious threat to - or decline in - the Manx economy with resultant pressure being brought to bear by the banks.

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