The muddle markets of British banking guarantees

Banks in Britain look likely to pay higher insurance levies as regulators recover from a muddle over their position over the support for, first, depositors in Northern Rock, and second, depositors of all other banks.

The extent and detail of the support of Britain's government for the deposits of shaky Northern Rock - the subject of a colourful though not yet fatal run either side of the previous weekend - has highlighted the ambiguous nature of public sector support for failing banks.

Official statements on the nature of the support of the Bank of England and Treasury for Northern Rock and all banks changed almost by the day over the course of the liquidity crisis.

On day one of the crisis (Friday, September 14) the position was that the Bank of England would act as lender of last resort, lending funds to the bank at penalty rate of interest. (Northern Rock appears to have utilised about five billion pounds of this facility last week).

On the Saturday, day two, the position was ritualisic restatement of the capital adequacy and solvency of the bank (even as tempers flared over the inability of depositors to withdraw funds in all cases).

On the Monday the position turned - in media interviews with the chancellor, Alistair Darling - into a blanket guarantee on all deposits in the nation's banking system.

Published documents (for example, at the Treasury website) appeared to limit the guarantee to "all the existing deposits in Northern Rock during the current instability in the financial markets". Darling's media interviews made clear that the guarantee was system wide, or so many observers concluded.

On the Wednesday the Bank of England was now dealing extensively in the three-month money market, having resisted this move for weeks and having also unsuccessfuly leant on Britain's clearing banks to make credit more widely available to their fellow lenders themselves. The BOE also undertook to widen the collateral it was willing to accept (including mortgages).

By the Thursday (day seven, and by which stage the run was essentially over), Treasury and its minister reconsidered the apparently unlimited guarantee announced on the Tuesday. The government's support was now limited only to deposits of Northern Rock, and only those recorded as at the day before (September 19).

Treasury defined deposits widely, however, to include wholesale deposits (though excluding covered bonds, securitisation programs and subordinated and hybrid capital).

And then by last weekend the position shifted again, at least in relation to other banks. Darling gave an interview to The Times in which he said there would be a review of the (by now) irrelevant deposit insurance scheme and talked of lifting the notional level of insurance deposits to around 100,000 pounds, up from around 30,000 pounds now.

This most likely means a lift in the cost of deposit insurance for all banks, including NAB's subsidiary Clydesdale Bank.

Meanwhile the search for a buyer for all or part of Northern Rock appears to be attracting almost no interest, according to numerous media reports late last week or over the weekend.