Govrnment Guarantess for Bank Deposits.

I should prefer the guarantee to cover slightly less than the full sum deposited. I suggest deducting one year's interest from payments made under the guarantee scheme.

That would ensure that the guarantee would be less on accounts paying higher interest, which tend to be the less secure institutions. I think Northern Rock paid higher rates on deposits than did most of its rivals.

The question is becoming academic, at least for the time being, as European Governments follow each other in offering 100% guarantees for all deposits, but that raises a new problem.

Governments that guarantee all bank deposits will be tempted to regulate the banks to restrict them to making only the safest loans, which would be loans secured by assets unlikely to depreciate below the value of the loan. That would not just rule out 100% mortgages, but also a great many overdrafts, both for private individuals and for companies, and probably all credit cards. The demise of the latter would at least speed up queues in supermarkets!

Would the restriction of bank credit encourage the creation of new institutions, with no government guarantee, to specialise in risky loans ? If so their services could be very expensive.