Archive for August, 2012

A government guarantee would encourage people to move their money

August 24, 2012 Leave a comment

Michael Peacey

Banks have hit the headlines so many times in the last five years that we are no longer surprised when we hear that a bank has been up to no good. At the moment we’re told HSBC helped rogue nations. Last month the headlines were filled with resignations at Barclays over the Libor scandal.

The campaign “move your money” (MYM) encourages customers to turn their backs on evil and take their current account to a more ethical place. The campaign promises that not only will moving your money reduce things like risky-speculation and mis-selling insurance to old ladies, but it can even bring about social or environmental benefits.
It is even suggested that ethical banks provide competitive interest rate, so you won’t even be out of pocket. So why hasn’t everyone moved? When there is an externality in a market (think of the children), individual’s don’t get enough private benefit to compensate them for the hassle of moving. In situations like these the government can often step in. However, it could be difficult to tax a broke and tax-avoiding bank.

While the MYM education campaign might encourage a few to move their current account (I’m still not convinced they want my current account, after 7 years of being a student), it’s not guaranteed to snare the very wealthy. These guys are already aware of where their money could be!

The solution is the FSCS (Financial Services Compensation Scheme). Since ethical banks claim to avoid the risky-speculation of their harmful competitors, the money in them should be safe. Hence, it should be cheap for the government to increase the maximum compensation of ethical banks. We’ve already seen (Northern Rock, 2007-2010) how quickly money moves when the government offer a 100% guarantee. Surely the government can use this influence to encourage us to make a positive decision about where to put our money.