Savings and Hot Money - Shelters from the Storm

How many of you would be prepared to swap the cash you have in a British bank to a commercial bank somewhere else in Europe?

Germany has followed the example of Ireland in offering a state-backed guarantee for all retail savings deposits within their banking system. The decision to safeguard deposits in Europe’s biggest economy and the country with the most savers came as Hypo Real Estate, Germany’s second biggest commercial property lender has reached the brink and is struggling to put together a successful rescue plan.

Robert Peston speaking on BBC news tonight indicated that Alastair Darling, the UK Chancellor of the Exchequer will have to follow suit within a matter of hours. In a truly globalised banking system largely devoid of foreign exchange controls and where money transfers take place at the click of a mouse, investors will gravitate to where the risk-adjusted rate of return is best. Given the fragility of the banking system - a system that can only run on trust - if only a handful of EU countries provide a cast-iron government guarantee for savings deposits, inevitably huge amounts of cash will flow towards them risking the capital base of banks in countries where retail deposits are protected to a lesser degree.

The German government has provided a safe haven - a rock in an increasingly hard place and the power of hot money will force one of the most remarkable policy decisions of recent years - to underpin savings deposits with state guarantees.

Robert Peston on the search for safe havens among worried depositors.