Tuesday, September 2, 2008

How safe is your bank?

The Treasury took dramatic steps to boost investor confidence this week, as official figures revealed that savings have plunged to their lowest level for nearly half a century.
Chancellor Alistair Darling proposed raising the statutory compensation scheme to protect bank and building society investors to fully cover the first £50,000 lost per person, in the unlikely event of an authorised institution going bust.
More about borrowing
Full coverage on savings
Earlier, National Statistics quietly disclosed that the percentage of household income being saved during the first quarter of this year fell to 1.1 per cent. That is the lowest the household savings ratio has fallen to since 1959 and about a 10th of its level when Gordon Brown became Chancellor in 1997.
Depositors queuing outside Northern Rock in September 2007
Savers' confidence remains badly dented by the run on Northern Rock last September. When it became known that the Bank of England, in its role as lender of last resort, had granted the former building society emergency financial support, depositors responded by queuing outside Northern Rock branches to demand their money back.
There was another adverse reaction when Chancellor Alistair Darling announced proposals to strengthen the safety net for savers on Tuesday this week. The FTSE 100 index fell 146 points on the day – or by 2.6 per cent – with bank shares leading the way down.
But it has been more than a century since any major bank went bust. Overend, Gurney & Company failed in 1866.
More recently, the secondary bank London & County failed in 1973 and Barings Bank had to be rescued in 1995, when it was bought for £1 by the Dutch giant ING. Grays Building Society was the most recent collapse in that sector, back in 1978.
Adrian Coles, director-general of the Building Societies Association, said: "Grays was the subject of a big fraud by its chief executive but the other societies rallied around and the only people who lost any money were the other directors."
Mr Darling said: "No system of regulation can or should prevent the failure of each and every institution, but we must do everything possible to prevent problems which could pose a wider threat to stability.
"The challenge is to ensure that the authorities can act quickly and decisively where necessary to support financial institutions. These proposals will give the authorities the full range of powers they need."
In addition to lifting the maximum compensation payment from its current level of 100 per cent of the first £35,000 per person lost to £50,000 per person, the Treasury proposes to discount any debts individuals may have to failed institutions when calculating compensation. At present, mortgages and other loans outstanding can be taken into account to offset compensation paid for deposits lost. So if you owe the bank more than you have in savings with it, you are not entitled to any compensation.
No changes to the statutory safety net are likely to take effect before the Treasury's consultation period ends on September 15. Here are some tips for savers to consider now.
Deposits with all banks and building societies authorised to trade in the UK by the Financial Services Authority (FSA) are covered by a statutory safety net called the Financial Services Compensation Scheme (FSCS). This can pay compensation up to 100 per cent of the first £35,000 of losses per person.
Since the FSCS was set up in 2001, no bank has gone bust.
You can find out whether any firm or individual is authorised by the FSA by telephoning 0845 606 1234 or going to and searching by reference number or name.


Because of the maximum limits on compensation payments by the FSCS, cautious savers whose deposits exceed these sums should consider spreading their money between two or more institutions.


Depositors with a foreign bank that failed could have to make their first claim against a foreign compensation scheme.
A spokesman for the FSCS said: "In the event of a failure of one of these banks, the home state scheme would have lead responsibility for claims and would pay the first part of any compensation. This might cause some delays in resolving claims as FSCS may have to depend on information from the home state scheme before paying any top-up compensation."
Size is not a guarantee of security but smaller institutions are likely to be more dependent on one sector of the market – such as advancing mortgages to buy-to-let landlords – and have smaller reserves against unexpected setbacks than larger banks or building societies.
Here are the biggest five banks and building societies with group assets, according to the British Bankers' Association (BBA) and the Building Societies' Association (BSA):
Royal Bank of Scotland £1,900bn
Barclays £1,200bn
HBOS £667bn
HSBC Bank £622bn
LloydsTSB £353bn
Building societies
Nationwide £179bn
Britannia £37bn
Yorkshire £20bn
Coventry £15bn
Chelsea £13bn

Credit-rating agencies are paid by banks to issue assessments of them – and he who pays the piper may call the tune.
Similarly, credit-rating agencies were paid by bond issuers to assess many of the bonds – such as collateralised debt obligations (CDOs) – which contributed to the credit crisis after so many banks bought them.

Independent statisticians at point out that savers with deposits in more than one subsidiary of a group of companies are only covered by one maximum allocation of compensation per person from the FSCS.
Moneyfacts' Rachel Thrussell said: "For example, HBOS Group includes Birmingham Midshires and Intelligent Finance, as well as Halifax and Bank of Scotland. Also, RBS Group includes Direct Line and Ulster Bank as well as NatWest and Royal Bank of Scotland."
Brian Capon of the BBA added: "Savers with deposits in more than one subsidiary of a group of companies are only covered by one maximum allocation of compensation per person.
"While this is accurate if the institution is authorised by the FSA at group level, if the subsidiary businesses are authorised separately in their own right, then the compensation limit will apply to each of them separately.

The BBA operates a code of practice setting out minimum standards for treating customers – including handling complaints – but not all banks or building societies authorised to trade in the UK subscribe to the BBA code. You can check who is covered and who is not by going to

A bank which is willing to advance mortgages equal to six times borrowers' income and loans up to 125 per cent of property value may not be as safe as one with more cautious lending criteria.

For more than a year now, worries have been expressed here and elsewhere about increasingly generous lending terms and rising dependence on complex derivatives – such as CDOs.
Similarly, the share prices page gives an indication of what the stock market thinks of each bank.
For example, to take two examples current this week, a bank whose shares are yielding 33 per cent may not be as financially robust as one which is yielding 3 per cent .

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