Some People Are Suggesting Caution With The Icelandic Banks
Many savers have recently taken advantage of the great rates of interest offered by the newcomer Icelandic banks.
The biggest is most probably IceSave which burst on the scene about 18 months ago offering a savings account with little or no small print and rates considerably higher than the official Bank of England interest rate.
Savers, many of whom used to bank with ING Direct, quickly shifted billions to these accounts, and quite rightly so because ING played the old, much loved (by the banks) and very profitable marketing trick -
- Announce a best buy busting savings rate
- Attract billions of pounds worth of savings
- Make sure the account because of the high interest rate is continually lauded by the media for a few years
- Then slash the interest rate because banks know that many of their customers either won't notice or won't bother to move their money
Remember, these days the only way to get the best return for your money is to check on the market every 6 months and have no qualms about moving your cash from one bank to the next.
Icelandic Banks Have Been Described As 'Fragile'
For some of the Icelandic banks it now looks as if the storm clouds are gathering. This is because Moody's, the credit rating agency, has described the country's banks as 'fragile' and is reviewing the country's triple A credit rating.
What is somewhat strange about this and also pretty unnerving is that a triple A credit rating is the best possible so to collectively describe the country's banking as 'fragile' while still rating them AAA doesn't make a lot of sense. And when things don't make sense with money it's normally a better strategy to take immediate action first and then ask questions later.
Watch The £35,000 Banking Guarantee
We said some months ago to watch the £35,000 guarantee that all savers have on their money with the banks.
This is because most people think that the Financial Services Compensation Scheme (FSCS) has billions in reserve all ready to pay out on any emergency.
So if you have £10,000 on deposit with the XYZ bank and it goes broke on Monday you'll receive a cheque by Friday. Sadly, it doesn't work that way because it is rumoured that the FSCS only has a few million pounds in reserve.
What the FSCS will do in case of an emergency is call up all the banks and ask for a 'donation' and it will use this money to pay back those who've lost money (up to £35,000). OK, this is a simplified explanation but its foundations are solid.
To put it bluntly what it means is that if you lose money today via your bank going under, it might be a long time before you actually get it back. The solvent banks when called for the money will no doubt argue, squirm, seek 'legal advice' and any other strategy they can think of to delay or reduce paying out their share.
What To Do If You Have Money With An Icelandic Bank
This is how I would approach the problem.
- If I had under 50% of my total savings (under £35,000) with an Icelandic bank then I wouldn't be that concerned
- Assuming of course I was getting a great interest rate I would leave up to around £20,000 there
- If I had in excess of £35,000 deposited with any one Icelandic bank then I'd withdraw the money (leaving say £20k-£30k) and start to deposit my balance with UK banks
- Frighteningly I hear that some savers have literally hundreds of thousands on deposit with some of Iceland's banks
- And in the current financial climate everyone should really start to get a lot more defensive with their liquid capital
- In fact if I had over £35,000 with any bank, UK or not, I'd start spreading it around.
Why Be So Defensive With Cash Savings?
Many economists are suggesting that the whole global banking system is in real danger due to the potential domino effect.
Bad banks in effect can take good banks down with them which in turn leads to further casualties. While I admit this forecast presently looks somewhat sensationalist, the markets have a habit of making its participants look like fools.
Who for example exactly a year ago would have thought that Northern Rock would be nationalised within 10 months when the bank's shares were trading at £11.50 versus an all time high of £12.50?
In fact anyone who did suggest this, and I'm sure there were at least a couple of rogue analysts who saw the risks of Northern Rock's business model, were most probably labelled as crackpots.
So keeping large amounts of cash with any one financial institution, regardless of their name or company pedigree, is just not sensible and prudent personal financial management right now.
Opening New Bank/Savings Accounts Is Pretty Easy These Days
Some people may argue that opening many different accounts is 'messy', too many forms need to be filled out, and too many accounts can lead to losing track of your money.
I would have agreed with this line of thought pre-internet banking, but now if you bank online it really is simple to keep track of all your money, transfer it in or out and generally keep on top of things.
Opening an account is also usually a very simple process as long as you're on the electoral roll, in fact with many accounts all the forms can be filled out online.
Tip - If you do have many different bank/credit cards accounts it's often very easy to lose track of all the passwords and general login information. I have found the best way to deal with this problem is to -
- Buy a small notebook, enter all the details and keep it near your PC at all times
- If you don't like the thought of writing all your passwords down then enter them in some sort of code
- For example, if I were to use the password cambridge99 I would put c99 in my notebook as a hint
IMPORTANT - Which Banks Own Which Banks
It is vital right now to know that many banks and building societies are not independent, they are owned by the same parent company.
For example, Halifax, Bank of Scotland and Intelligent Finance are not three separate entities, they all are owned by the banking group HBOS. This means that if you have £35,000 deposited with all three only £35,000 is covered and not £105,000 as you may think.
It's all to do with whether a bank/building society holds an individual banking licence or is using the one of its parent company.
The Royal Bank of Scotland, Natwest and Tesco finance are in turn owned by the RBS Group but under separate licences so if £35,000 was deposited in all three and RBS went down the full £105,000 would be covered.
Slightly confusing and also somewhat of a disgrace that this important information is not made both clearer and more public.
The following tables shows who holds individual banking licences and who uses a licence under the umbrella of a parent company.
