The Greeks have joined the Irish in a bold promise to guarantee their banks.  If things go wrong for them then their taxpayers are in for a nasty shock, just like the Irish.  How long will it be before we have a truly two tier banking system where there are banks guaranteed by their home country and there are other banks where people feel it is unsafe to deposit their savings?  

We’ve already seen money flowing back into Northern Rock until they were forced to stop taking deposits due to their ‘unfair’ advantage of government backing.  The same thing may now be happening with Irish banks (although I don’t know how much I trust their guarantee).  Is there a point where the guarantee becomes worthless?  If the country itself doesn’t have the money in reserve, will anybody else loan it to them to make good on the guarantee?

The Germans are, rightly I think, against any plans for a european bailout:

The Greek move puts fresh pressure on Germany to back the mounting calls for an EU lifeboat fund to shore up Europe’s struggling banks, even though such a plans are anathema to Berlin. Chancellor Angela Merkel warned that there would be no “blank cheques” for those who get into trouble.

The Telegraph

Whatever the eventual outcome, the debate goes in on Europe and is likely to go on for some time:

Neelie Kroes, the EU competition commissioner, said that Ireland’s decision to act unilaterally — disregarding EU state aid rules — risked a descent into the beggar-thy-neighbour mayhem of the Great Depression.

“When Europe was confronted with a banking crisis in the 1930s, governments decided to go national and close their borders. Protectionism was not the solution at the time, as we very well know. Let us not make the same mistake twice,” she said. Brussels has already been overtaken by events.

David Owen, Europe economist at Dresdner Kleinwor, said Ireland had no choice, given the lighting pace of events on Monday. “Their banks were going down. No government can let that happen. They did exactly the right thing to ring fence this.”

The demise of WaMu was the biggest bank failure in US History.  Nearly 10 per cent of its retail deposits were withdrawn in the lead-up to the failure (mostly deposits that were above the FDIC’s insurance limit).  Talk about shorting banks leading to a fall in confidence?  These days we make a pretty definite statement when we take our savings elsewhere.  It may be a self-fulfilling prophecy but nobody wants to be the last one off the sinking ship.

The failure wiped out shareholders in the bank.  JP Morgan Chase didn’t take on the holding company’s debts, just the juicy bits that were worth keeping. In fact, why would anybody come to the rescue of a bank now in the knowledge that they will be able to buy up the assets cheap after the bank goes into administration?  The best bits of WaMu were sold to JP Morgan for $1.9 billion.  WaMu was valued at over $30 billion a year before its collapse so that’s a pretty good bargain!

So who’s next to go to the wall?  Looks like Wachovia.  The sixth largest US bank saw its shares plummet 27% on Friday and is looking for buyers.  The struggling bank has $122 billion of distressed debts so it’s difficult to see who would want to come in and save it rather than wait for it to go to the wall and come in afterwards to pick up a bargain.

With so much uncertainty and panic in the financial sector at the moment even those of us who don’t normally fret over such things are considering where to shelter our savings from the storm.  But let’s not forget that we are protected by the Financial Services Compensation Scheme in this country.

Visit their site for details but essentially if you have your savings in a UK bank or building society then the first £35,000 (set to rise to £50,000 sometime this year) is protected by the scheme.  If you have more than that in a single institution then it may be wise to spread your money across several banks so none holds more than £35,000.  Be aware that some different brand names are actually the same institution and you will only be covered once e.g. Abbey and Cahoot are the same and the whole of HBOS counts as one.  You can check this by looking at the FSA registration number on the website of your bank – if it’s the same on both sites then irrespective of the logo on the page it’s essentially one institution.

Foreign banks are different.  Make sure your bank is registered with the FSA and that it’s compensation scheme will cover you for the whole £35,000.  Of course compensation schemes are a last resort.  I’d rather my bank stayed solvent in the first place.

Do you have money in IceSave or Kaupthing Edge?

Icelandic banks were given a bit of a bashing by Moody’s this year who described them as fragile.  But then again what do the ratings agencies actually know?  Lehmans was rated A2 the day before it went bust! Financial instruments these days are so complicated and there are so many convoluted deals across the globe that even the bankers themselves have no clear idea what they are invested in and what risk they carry.  And that’s before you even mention frauds like Enron where you really have no idea of the risk.

Do you have money in Egg?

They are owned by Citigroup (they bought the poorly performing Egg from Prudential for around £575 million in 2007) who have been downgraded and are currently listed on Fitch ratings system as a negative outlook.  Should you worry more about that than the Icelandic banks?

Northern Rock – a nationalised bank

A year after the run on the bank it seems odd to say it but if any bank is safe it has to be Northern Rock.  We’ve already bailed it out at a cost of billions so the government just could not let it go under now and all deposits are 100% guaranteed.

National Savings – the original nationalised bank!

We tend to forget about boring old National Savings but your money is certainly safe there too.  The ISA rate looks pretty poor (at time of writing) but the index linked savings might be worth a look.