100% protection on savings – update

I recently wrote about the ability to protect your savings by taking an offset mortgage.  My mortgage broker friend has just given me an update to clarify the situation.

If you hold savings and debt (mortgage, loan etc) with a single institution then it is your NET position which is used to determine what you owe or are owed should the bank collapse.  This is not a feature of offset mortgages in particular but I mentioned them because the interest you save is tax free which is a nice bonus.  Anyway, here’s an excerpt from Barclays website:

The Financial Services Compensation Scheme (FSCS) is the UK’s statutory fund of last resort for customers of authorised financial services firms. Among other things, the FSCS protects customer deposits with authorised financial services firms. Barclays Bank PLC is an authorised financial services firm and so our customer’s deposits are covered by the scheme. The maximum level of compensation payable under the scheme for deposits is £35,000 per person. The level of compensation is effective since the 1 October 2007.  If a bank were to go into default, the FSCS would consider the overall net claim.

This means that if the claimant’s borrowings exceeded his/her savings, there would be no overall claim against the bank, and the claimant would not be entitled to any compensation. For example, if a customer had a mortgage of £200,000 and savings of £150,000 with the same bank, set-off would be applied As a result, the individual still owes the bank £50,000. There would be no positive balance and no claim. If, however, the savings exceeded the mortgage, the compensation rule of £35,000 would come into play.

So there you have it from the horse’s mouth.

Will the banks bankrupt countries?

I mentioned yesterday that people might now be looking at the creditworthiness of countries rather than the banks themselves.  This is after recent moves to bail out banks by several nations – most notably Ireland.  You see the funny thing is that in some cases the banks are now bigger than the gross domestic product (GDP) of their nations.  Here are a few examples:

Kaupthing Edge has total assets of €53bn – that’s 623% of Iceland’s GDP.

Landsbanki (IceSave) has €32bn – 374% of Iceland’s GDP.

They’re not the only banks in Iceland but between them represent around 1,000% of Iceland’s GDP.  With Glitnir having recently drained the Icelandic government’s coffers, would there be anything left to support other banks?  Of course it’s not quite that simple – if a bank goes bust all of it’s cash deposits don’t suddenly disappear.  On the other hand, this market is all about confidence – or rather a lack of it.

How about Ireland’s bank guarantee?

Bank of Ireland – €183bn – 102% of Ireland’s GDP.

Anglo Irish – €97bn – 54% of Ireland’s GDP.

Just two of the guaranteed banks have assets worth around 150% of GDP.  And let’s not forget that Ireland’s economy has been rather bloated recently due to an astonishing property boom that has now become a property crash.  The guarantee was a very shrewd move but essentially backed by thin air.

Now we turn to another bank popular with savers, ING.  It has assets of around €1,370bn which equated to 290% of the Netherlands GDP.

The UK has a number of huge banks.  RBS, HSBC, Barclays, HBOS, Lloyds TSB, Standard Chartered, Alliance & Leicester, Bradford & Bingley between them have assets of €6,900bn which represents 420% of GDP.

There is a nice list of these figures on the FT website here.

Banks declare each other likely to default due to their excessive leveraging then countries take on their bad debts to support them.  We are simply transferring all the bad debt to the countries instead.  Would I loan money to Iceland or Ireland?  Nope.