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May 25, 2012 6:12 pm
A weakening euro has reduced the deposit protection for savers in European banks by £5,000, giving them less cover than the UK safety net provides, even on accounts offered in this country.
Several banks that operate in the UK are not covered by the UK’s Financial Services Compensation Scheme (FSCS) – which guarantees to protect £85,000 of savings per customer, per bank.
Savings accounts offered by ING Direct and Triodos Bank, for example, are subject to the Dutch depositor guarantee scheme, which covers €100,000 per customer. Similarly, UK savings accounts with Bank of Cyprus are protected by the Cypriot scheme, which also covers €100,000 per customer.
But, as the compensation is denominated in euros, it is now worth less than the FSCS cover. Currency fluctuations mean that €100,000 translates to £80,000, £5,000 less than the sum guaranteed by the FSCS.
Offshore savers are also offered a smaller safety net than onshore counterparts. International banks and building societies operating in Guernsey, Jersey and the Isle of Man offer maximum compensation of £50,000, and less binding promises about the speed with which money will be repaid.
Economic data from Europe has raised fresh concerns about the stability of the continent’s banking system, and the risks to savers if the eurozone disintegrates.
All major UK banks are members of FSCS, which has paid out more than £26bn to more than 4.5m people since 2001. At the start of this year, the maximum compensation offered was raised from £50,000 to £85,000 per customer per bank, to keep it in line with the European €100,000 limit.
How safe are your savings if they’re only protected by the European safety scheme? Listen to Elaine Moore on the FT Money podcast
Although there is no indication that UK savers would need to make claims on these schemes, analysts have advised customers to be aware of the levels of cover. “Where possible, always keep your cash within the £85,000 limit,” said Kevin Mountford, head of banking at Moneysupermarket. “If a bank gets into trouble, it is to be hoped the UK government would arrange a bailout, though that of course isn’t guaranteed.”
UK bank customers should remember that, in contrast to the pre-crisis situation in 2007, when UK banks were among the worst capitalised in Europe, they are now much better funded, writes FT banking editor Patrick Jenkins.
Although the Financial Services Authority was criticised during the global financial crisis, it has since gone out of its way to be one of the toughest regulators around – and all four of the largest lenders in the UK have raised their core tier one capital ratios to between 10 and 11 per cent. Core tier one capital ratio is the key measure used by the regulator, analysts and investors to measure the solidity of banks. UK banks now have higher ratios that their European peers.
Downgrades of UK banks by credit rating agencies is not necessarily a concern for savers. Banks around the world are being downgraded – in part because of the tougher regulations that have been imposed. Savers should also remember that there are other measures that can be taken by the regulator to protect banks before customer deposits are put at risk.
Analysts have also stressed that European banks have worked hard to “de-risk” since the financial crisis of 2008. The Independent Commission on Banking has recommended that retail banks should strengthen their positions by boosting the amount of capital they hold.
Royal Bank of Scotland, in which the UK government holds an 81 per cent stake, has raised its core tier one capital ratio (a measure of the best-quality funding) to 10.8 per cent, while Lloyds Banking Group, which is still 41 per cent owned by the state, has increased its core tier one capital ratio to 11 per cent.
Despite this, credit rating agencies have chosen to downgrade a number of the UK’s largest banks.
Last week, savers expressed concern after Spanish bank Santander was downgraded by credit agency Moody's, in light of the escalating eurozone crisis.
Santander UK has reassured its customers that is a separate entity from its Spanish parent, with all savings from British customers remaining in the UK and coming under the protection of the FSCS.
Savers with European banks that do not come under the FSCS can find themselves in a very different position, though. When Iceland’s banking system froze in 2008, savers in Icesave found that they were protected by the Icelandic protection scheme, not the UK’s, and left waiting for compensation.
However, most of the international banks offering the best buy savings rates in the UK are covered by the FSCS – including the Indian banks ICICI and State Bank of India.
Savings accounts at the Post Office, provided by Bank of Ireland, are also fully covered by the £85,000 limit.
To check the deposit protection on any bank operating in the UK, visit http://www.fsa.gov.uk/static/pubs/consumer_info/deposit-protection-eea.pdf.
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