Small enough to fail

By A.M | LONDON

AN ALIEN visiting earth for the last few years could be forgiven for thinking there were only two types of banks: those too economically important to fail and those too politically sensitive to fail. For the latter, think of the British government slapping a 100% guarantee on Northern Rock deposits, saving savers (who of course are voters too) from the consequences of a bank failure. The apogee of this strategy came in Ireland, where the government's decision to guarantee the entire banking system has hobbled the country with debt.

The alien might be surprised then, by recent events in Europe. Two weeks ago Britain's Financial Services Authority ordered the liquidation of Southsea Mortgages and Investments, a tiny lender hailing from the town of Havant on England's sleepy south cost, after loans to property developers went sour. With an asset book of only £10m and deposits of around £7.5m, the bank was clearly not too big to fail. But the Treasury has set a precedent by refusing to compensate the 14 customers who had deposits in excess of the £85,000 covered by the government's deposit guarantee scheme. This marks the first application of Britain's new bank resolution regime, which allows for senior unsecured bondholders, as well as depositors, to share in the pain of restructuring.