Are Your Savings Safe?

October 1, 2007 By

In late September a spectacular panic befell Northern Rock customers after it was revealed that the bank needed an emergency loan from the Bank of England. Share prices plummeted and savers rushed to make withdrawals. In just one week, an incredible £12 billion was withdrawn; it was the first run on a UK bank in 150 years, and it made many of us wonder – just how safe are our savings?

While the worries in financial markets that troubled Northern Rock haven’t seen any signs of going away, there has been an invasion of foreign banks into the UK market over the past year. These have often tempted savers with mouth wateringly high interest rates, placing them at the top of many comparison tables on websites. Two companies doing this are the Icelandic banks Icesave and Kaupthing Edge; they have attracted over £6 billion worth of savings in 170,000 different accounts. However, it has been said by some in the City that depositing in foreign accounts carries a much higher risk than many of the UK banks.

While both banks have high profits and good credit ratings, one of the most unnerving statistics to quote about these banks is their Credit Default Swaps. These complex trades that allow investors to rate the chances of a bank defaulting on its corporate debts by giving a score, for which zero is perfect. Lloyds TSB is currently operating at an 85 point rating, while Bradford and Bingley, a second tier bank, is operating at 300. Landsbanki, who own Icesave, are scored at 469, while Kaupthing is 706.

The real issue at stake is just how likely these banks are going to go bust. The reality is that it’s highly unlikely, and they are still incredibly safe when matched against things such as the stock market or even the value of property. To some extent, the savings within both banks are still also guaranteed by the FSCS in a similar manner to UK banks. In the case of Kaupthing Edge, which is a foreign bank operating in the UK as a subsidiary, the first £35,000 is guaranteed.

Icesave, meanwhile, is a foreign bank operating in the UK as a branch. Consumers then have to rely on a foreign protection scheme. The Icelandic deposit protection scheme is responsible for close to the first £16,000 of your savings. For the remaining £19,000 the FSCS is responsible. Fortunately, Iceland’s central bank governor says the country can afford to guarantee all deposits.

There are other ways to save, of course, and some of the UK banks can offer far superior interest rates to the Icelandic savings anyhow. For instance, Alliance and Leicester’s regular direct savings accounts offer 12% gross after 12 months – although you can only pay in a maximum of £250 a month, so it’s not suitable for those with a lump sum. Otherwise you can use an ISA, with a tax free rate of 6.25% (maximum £3000 cash - £3600 from April 1^st 2008), or their eSaver, which has a rate of 6.5% AER (variable).

Rates quoted are correct at the time of writing (04/03/08) and may be subject to change by banks by the time of reading.

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