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.