Column : Everyone’s down but who’s right?

Font Size

Print

Feedback

Email

Discuss

: which should attract private investors to the market and help discover these assets’ real prices. The UK approach resembles a partial nationalisation of the overall assets (not just the toxic parts) and a direct infusion of fresh capital, which should boost up market confidence and incentivise inter-bank loans immediately. In spirit, the UK plan is closer to the Swedish bail-out plans (adopting draconian measures towards privatisation) executed in the nineties.

British banks are different from their US counterparts at least in two aspects. First, the loan to deposit ratios of the British banks average almost 140%, much higher than the US figure. Second, unlike in the US, most British banks have a presence in both deposit and brokerage markets. These factors make the UK banking system more vulnerable to current shocks.

Another big difference between the US and UK is the latter’s geographical proximity to other European countries, which makes it more vulnerable to its neighbours’ policies. Ireland, for example, has just announced 100% insurance for the depositors and bond holders with its major banks. Germany has announced full insurance for all its depositors. Events like this could easily lead to a cross-border capital flight. In response, the UK has also increased its deposit insurance ceiling to £50,000. These developments suggest coordinated efforts. Given the diversity of countries within the EU and the polarisation of their opinions, it remains to be seen whether the EU comes up with a concerted rescue plan in these times of despair.