How dare the British public seek to deposit funds with Northern Rock!  The safety of a nationalised bank appeals to a huge number of people and, 1 year after the run on the bank, we’ve had queues of people trying to put money back in.  The Moorgate branch in London was only seeing new customers by appointment even though they only had two products left to sell – their cash ISA and a branch saver (you have to go into a branch to do anything with your account!).  Customers who had made appointments the day before returned today to find that the well-priced bond they wanted had been withdrawn overnight.

So, why should we not seek the safety of Northern Rock?  Because the government guarantee gives it an advantage over other banks, making them more likely to lose savers’ deposits and therefore more likely to require a bail out themselves?  To be fair, they are committed to this course of action.  Under European competition laws, Northern Rock can not hold more than £17.6 billion in customer deposits – equivalent to 1.5 per cent of all savings held in British institutions.

Interestingly, National Savings, whose rates on most things are extremely poor anyway, cut it’s rates recently.  Making the safe havens less attractive?  Why do I get the feeling we’re being herded like little savings cattle?

UPDATE 2 – Iceland suspends trading in financial company shares

UPDATE – In the last few days I have moved my personal cash out of Icelandic banks.  That’s not a recommendation for you, just what I’m doing.  The article below was written about a week ago and this one ‘How to get 100% protection on savings’ was written yesterday.

Lots of people have been asking me recently if it is safe to save with Kaupthing Edge so I thought I’d do a quick post on that single topic.  First, I have no doubt that the reason you are all asking the question is because the interest rates paid by Kaupthing are excellent (at least at the time of writing) and you actively want to save with them – otherwise I would say just put your money in National Savings and Northern Rock (see my previous post Are your savings safe? to see why).

The most important thing to remember is that Kaupthing Edge are fully covered by the UK’s Financial Services Compensation Scheme. Under this, all your savings are guaranteed up to £35,000. However, if you put your account in joint names (assuming your partner won’t run off with your cash) then you are jointly covered for £70,000.  You’re not getting extra protection, just each person’s protection added together.  Also, remember that the compensation scheme is per institution, not per account.

So the fact is that you are covered up to £35,000 by the compensation scheme but what if lot’s of banks go bust – is there enough money in the scheme to protect everybody?  No, there isn’t enough right now but the government has pledged to loan the money to the scheme in order to meet any protection requirement.

So with all this protection in place you may wonder why the fuss?  The original worry over Kaupthing came about partly because earlier this year the credit rating agency Moody’s described the Icelandic banking system as ‘fragile’.  The problem is that Iceland’s banks were hit hard as the credit crunch arrived. Being based in a nation of just 300,000 people with a pretty small economy has led them to rely largely on the troubled money markets rather than customer deposits.  Kaupthing and Landsbanki both opened Internet banks to attract customer deposits and reduce their dependence on capital markets.  The price an institution needs to pay for money on the market is a pretty good way to guage how the city insiders view the risk it represents – there’s a really good article on it at Moneyweek.

IceSave, part of Icelandic bank Landsbanki, operates under the passport system to the Financial Services Compensation Scheme, where they run the equivalent of a UK branch from their home country.  This gives them European Economic Area authority rather than FSCS authority.  If the bank went bust you would have to make a claim to the Icelandic compensation scheme rather than the UK one.  Iceland pays a maximum compensation of around £16,300 (depending on exchange rate with the Euro) then any sum over this up to your £35,000 maximum would have to be claimed through the UK system. In other words, you’re still covered but it’s more complicated.  Oh, and the system’s never been tested.

The long and the short of it is that you will have to decide whether the additional interest earned at Kaupthing Edge is worth the risk.  Personally, I prefer safety.  If you want complete safety just go for National Savings or Northern rock.

Your savings are safe.  At least they’re safe with National Savings as I mentioned the other day.  I thought I’d provide a quick update though since I am about to put some of my own money in their 3 year index linked product and I forgot to mention last time that they’re tax free… I’m not on commission either you know!

Guaranteed to beat inflation and tax free AND government backed.  Really worth a look.

Here’s the National Savings page about the index linked savings certificates

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.