There was always a massive gulf between the risk on bank deposits and that on (most) finance company deposits. The change to zero/government debt risk on bank deposits surely wouldn’t change this much. It is like saying motorcyclists would start taking the bus if only buses were fitted with seat-belts.

Say, 80%. Enough to make sure the system doesn’t collapse, but still enough to make it more risky.

Not too many tears for the Government – us – please. For years the government has taxed the full nominal interest paid out to lenders, including the risk premium, but it has never allowed individuals to deduct losses if their loans went sour. Now they have backed themselves into a scheme where they take all the losses on the downside but only 20 – 33% (ie tax) of the risk premium on the up side. Two wrongs don’t make a right, but the long term fiscal exposure of the government to the finance companies has been not nearly so bad as the short term position. And, with a modicum of justice, the taxes earned on the premiums are proportional to the premiums.

The biggest losers are of course those who lent the money in the past. paid taxes on the interest premiums, and then got no bail out when their loans went sour.

Andrew