Tag Archives: IceSave

Are your savings safer in building societies than banks?

With all the turmoil in the banking world, the disgrace of Iceland and a host of British savers getting a narrow escape*, I thought I would write a post about our often ignored building societies. After all, none of them have gone bust whilst all of the ones that the carpet baggers got their grubby hands have sunk like a stone. Just look at the casualty list of demutualised societies:

Halifax, Northern Rock, Bradford & Bingley, Alliance & Leicester, Birmingham Midshires… perhaps they should have remained mutual societies.

So why might building societies be safer than banks?

You have to look at why they demutualised in the first place. Northern Rock’s rapid expansion was only possible because it got a large portion of its funding from the money markets. This reliance on wholesale funding was ultimately the cause of it’s demise. Had it remained a building society it would not have been able to access this external capital, would not have been able to grow so aggressively and, I suggest, would not have gone belly up.

There are limits on how building societies can raise funds other than from individuals and on lending other than fully secured on residential property. At least 50% of the funds of a building society (or of the society’s group) must be raised in the form of shares held by individual members of the society. These rules leave no room for highly leveraged high risk growth strategies.

As at August 2008 there were 59 building societies in the UK with assets of £360bn, including mortgage assets of £250bn. Savings balances were £235bn. That seems pretty prudent to me.

The hunger for growth and expansion led Northern Rock to famously offer it’s 125% loan-to-value mortgages. This kind of irresponsible lending is not something you find in building societies. Building societies are primarily for the provision of (sensible) mortgage lending to members. They are not investment banks like Lehmans, JP Morgan, Goldman Sachs or any of the other irresponsible institutions that built their vast empires on massive leverage.

Now I hate to suggest that greedy executives drove societies to demutualise but… a study conducted in 2005 by Kent Business School showed that between 1993 and 2000 executive remuneration at demutualised societies increased by 293% compared to 65% at building societies.

Building societies also serve the wider interests of society in a way that banks just don’t. Not everything a building society does is driven by turning a profit – unlike banks. For example, if you struggle to get on the housing ladder and need a shared ownership mortgage where are you going to get one? Leeds building society, Kent & Reliance, Nationwide, (and Halifax but of course that’s a hangover from their mutual days). These are not the sort of institutions to take excessive risks for a bit of extra profit. They are cautious and, dare I say it, more caring than banks with a genuine concern for customers.

Having said all that, most of my personal money is not in building societies. I think that given the actions taken over the Northern Rock, Icesave, Bradford & Bingley episodes that if you are a UK resident with your money deposited in a UK bank then your savings are probably safe. I took my savings out of Icesave because I didn’t trust the Icelandic compensation scheme (phew!) but I have every confidence that my savings are safe where they are in Egg, Abbey, Northern Rock and Nationwide (the only building society on my list). Not only are they all covered by the UK Financial Services Compensation Scheme but the UK government has made it clear that they will not allow savers to lose their money.


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* Readers from the Isle of Man have commented that there were no guarantees for them and another reader who had savings in the Guernsey branch but was not resident there says that he’s not sure if he is covered. Bank guarantees are not international.

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UK to compensate all Icesave customers

The Chancellor has today agreed to guarantee 100% of savings for UK Icesave customers.  Yes, that’s not just £50,000 that’s the whole amount.  He said that the Icelandic compensation scheme had no money to meet its obligations and that he would step in and protect depositors.

This is fantastic news for all those with their retirement savings stuck in Icesave right now.

Darling said that he “wouldn’t normally do this” for the subsidiary of an overseas bank.  It really is every nation for itself at the moment.

“The Icelandic government, believe it or not, have told me yesterday they have no intention of honouring their obligations here,” said Mr Darling.

“Because this is a branch of a foreign bank the first call would be on the Icelandic compensation scheme which, as far as I can see, hasn’t got any money in it.

BBC, 8 October 2008

It seems to me that offering a guarantee without sufficient backing is tantamount to fraud and we should now be asking all guarantee schemes to tell us precisely what reserves they have.  Primer Minister Gordon Brown said the UK would take legal action against Iceland over its failure to guarantee compensation.

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Icelands Landsbanki (Icesave) in receivership

REYKJAVIK, Oct 7 (Reuters) – Iceland has dismissed the board of directors of Landsbanki and has put the Icelandic bank in receivership, a minister told state radio on Tuesday. Commerce and banking minister Bjorgvin Sigurdsson said the move was made in cooperation with Landsbanki and the bank would be open and run as normal while the changes were taking place. Sigurdsson said Iceland’s Financial Supervisory Authority had put its own people in place of the bank’s board. Late Monday, Iceland adopted sweeping powers over its battered banks as its financial system tottered and its currency plunged.

The Icesave website states:

We are not currently processing any deposits or any withdrawal requests through our Icesave internet accounts. We apologise for any inconvenience this may cause our customers. We hope to provide you with more information shortly.

Remember that nobody has lost any money yet.  Or at least we don’t know the full situation yet.  What is clear is that Iceland as a nation is pretty much bankrupt.

The global credit crunch has crippled Iceland’s biggest banks, which racked up foreign debts equivalent to as much as 12 times the size of the economy. The nation’s current account gap swelled to the equivalent of 34 percent of gross domestic product in the second quarter, mainly because of the cost of debt payments.

Bloomberg, 7 October 2008

The Icelandic government has apparently approached Russia for a €4bn loan.  It looks like they have received a warm welcome from the Russians who will no doubt bask in the good PR for many months to come.  Not to mention the geopolitical advances – didn’t the americans have a base there until a few years ago?

Icesave is Iceland’s second biggest bank.  I wonder how many people are trying to take their money out of Kaupthing Edge right now?


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Icelandic bank guarantee only for Icelanders

When the chips are down nations seem to retreat from international schemes and look after their own domestic affairs.  It seems to be our natural instinct and certainly the instinct of politicians who know where the voters are.  Iceland yesterday guaranteed all domestic deposits in Icelandic savings accounts, although UK savers in Icesave and Kaupthing Edge will not be covered.

Of course Kaupthing Edge savers are covered by the £50,000 UK compensation scheme so unless you have over £50,000 you are protected.  Savers with Landsbanki (Icesave) have to use the passport scheme.  That means applying to the Icelandic compensation scheme for the first tranche (around £15,000 or so) of compensation then apply to the UK compensation scheme for the balance.  This system is more complex and has never been tested.  If you have savings in Icesave then you may have been worried yesterday when you couldn’t withdraw your money:

Times readers reported yesterday morning that they could not withdraw their money from Icesave accounts over the internet. But a spokesman for the bank said that Icesave was now operating normally and depositors could withdraw money. He added that the Icelandic Government had ample foreign reserves to cover the £4bn of British deposits in the event of any collapse.

Times Online, 7 October 2008

Perhaps the Icelandic government has sufficient foreign reserves to cover UK customers’ deposits but I wouldn’t want to rely upon that.


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Iceland suspends trading in financial firms

If you are worrying about your savings in Icelandic banks – Icesave (Landsbanki), Kaupthing Edge – then you will be interested in this announcement today.  Iceland has suspended share trading in financial companies.

“This decision is made in order to safeguard the equality of investors while awaiting an announcement,” the statement said.

Reuters, 6 October 2008

And Times Online reports:

All the major credit ratings agencies moved today to downgrade Iceland’s four big banks and its sovereign credit rating. Fitch cut Iceland’s long-term foreign-currency IDR rating by two notches to A-, while Standard & Poor’s cut Iceland’s long-term foreign currency sovereign credit rating to A- from A and Moody’s put its Aa1 rating on review.

Read the rest of this very good article on The Times site.


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Icelandic banks give savers reassurance

Icelandic banks Landsbanki (IceSave) and Kaupthing Edge have been under real scrutiny since early this year over concerns that they might collapse.  They have always maintained that they are not in difficulty.

But Tryggvi Herbertsson, economic adviser to the Icelandic prime minister, said the government could and would step in.

“Definitely we would come to the rescue of a bank – definitely.

“The banking system in Iceland is very large compared to the economy, but still we think we can maintain the problem because the balance sheet of the bank is very good.”

“They have not been involved in sub-prime or buying housing debts from abroad and we are pretty confident that the balance sheet is healthy and the banks can operate healthily in the future.”

BBC Money Box, 4 October 2008

Both Icesave and Kaupthing are larger than the Icelandic economy.  It seems to me that the Icelandic government is saying is that they would come to the rescue because they believe the banks are well managed and run – their only problem being their inability to raise money on the markets.  Quite an assumption to make.


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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.


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