NOTHING is guaranteed in life, so why should bank deposits be? This is the only possible reaction to Chancellor Alistair Darling's unseemly rush to underwrite the risk assumed by savers in the wake of the Northern Rock fiasco.
It is perfectly understandable why the new man at the Treasury - and his prime minister - do not relish the spectacle of panicked investors queueing in Britain's high streets. But does that really merit treating a cash deposit radically differently from every other class of investment?
A cash deposit in a bank or building society is as much an investment vehicle as equities, bonds, properties or financial futures. The fundamental rule of the market is that if someone makes an investment, they accept the risk attached to that investment. What the chancellor is effectively doing is breaking this link.
His proposal, that the limit on which there would be a guaranteed return of
capital in the event of a bank collapse be raised from £2,000 to £35,000, introduces the concept of wholly risk-free investment with market rate returns. This, I am convinced, will come back to bite him.
I can understand the political thinking - the statutory protection of the UK's army of small savers, for whom £35,000 might represent a lifetime's savings. But the chancellor's preferred limit for a guarantee on savings is £100,000, and this takes the concept into a new dimension.
No-one for whom £100,000 represents their life savings should have it all on deposit in one bank. Most people with this level of liquid assets are aware of the clearly demonstrated advantages of a diversified portfolio.
And what about the potential danger to the long-term integrity of the government's own "safe haven" facility, National Savings? Investors in this risk-free environment may be tempted to seek a better return from a guaranteed bank deposit.
The Chancellor has said from the outset he wants to find a way of separating the assets of small savers who would, in fact, be ruined by a massive bank default from those who would be cushioned by other asset classes.
A reasonable solution might be to retain the universal £35,000 guarantee, which would protect the genuine small saver, but to make any capital loss above this limit eligible for offset. The government must be wary of being pushed by short-term crises into making long-term commitments which could cost future generations dear.
? Robert Kerr is managing partner at French Duncan, chartered accountants
