Supporting saving

The Government's attitude to our failing banks has created terrible negative effects.

The bail-outs have created massive "moral hazard", where bankers believe they can now take even bigger risks (and bonuses) than before, safe in the knowledge that the Government will bail them out if they get it wrong. Our mainstream politicians claim to be appalled, but this is a direct result of insulating bankers and their bond-holders from the consequences of their imprudence - an approach that all the mainstream parties supported.

The collateral damage from the bail-outs has been to perpetuate banks' beliefs that they can raise funds most cheaply in the money markets rather than from savers - another reason why savers get such a bad deal from banks at exactly the time that we want people to save more and when money would otherwise be scarce and savers would be able to demand much higher rates of interest.

We would take a different approach to troubled banks - we wouldn't bail them out, but we would give legal priority to the repayment of savers' accounts. As savings' accounts only represent a fraction of a banks' liabilities, and insolvent institutions usually have sufficient assets to cover a decent proportion of their liabilities, this would achieve two beneficial effects: (1) it would give savers confidence that they would be repaid, reducing the risk of runs on a bank and encouraging people to save, and (2) it would increase the risk of default on other providers of funds to banks, which would increase the cost of raising money this way, and thereby increase the interest that banks would be willing to pay for their main alternative source of funding - savings accounts.