Tag Archives: Kaupthing Edge

Icelandic, european, american and UK banks collapse

This is starting to sounds like something from a film.  Banks are falling like dominoes.  

1. We’ve all been worried about Kaupthing Edge and IceSave but here we are witnessing the nationalisation of Glitnir Bank. The Icelandic Government has taken a 75% stake in Glitnir for around £468 million after the company faced funding problems.  

Given that Iceland is a small nation – something like 300,000 people – whose banks rely on getting funding from international money markets, the news that the Icelandic Crown is down even further today will not help.  The remaining banks will effectively have to pay even more for their borrowing than before.  If Kaupthing Edge or IceSave need to borrow any money in the short term where will it come from?  I had some of my savings in IceSave but have transferred them to a UK bank. 

2. Bradford & Bingley nationalised.  The government provided a £14bn loan to protect customers’ deposits but the interest charged on this loan will have to be paid by other UK banks.  In other words the bank that goes bust leaves a mess that the more prudent banks have to pay for.  

3. The Netherlands, Belgium and Luxembourg have all chipped in to prop up Fortis with £8.9bn.  Smaller nations like Belgium and Iceland bailing out huge banks – I wonder how much money they have left to keep doing it if required.  Come to think of it, how will we keep doing it?  More borrowing.

Also in Europe:

Munich, Sep 29, 2008 – Hypo Real Estate Group has secured a major new credit facility which is designed to shield the company from the impact of the current malfunctioning of the international money markets.

Hypo Real Estate Group, Press release, 29.09.08

Did they say “current malfunctioning”?  I think they mean the current rationalisation of an industry that has been malfunctioning for at least a decade.  Also today, Hypo got rid of quite a few of its directors – strange if it’s just a malfunctioning market.  Anyway, the $50bn loan guarantee should keep afloat Germany’s second biggest commercial property lender.

4. Citigroup is rescuing Wachovia, the fourth largest US bank.  Citigroup is in no great shape itself but if it survives this era of financial meltdown it will be another banking giant.  This period of consolidation is likely to result in some truly enormous banks.

5. $620 billion pumped into the market from the Federal reserve but still markets around the world are today in turmoil.  The $700 billion rescue package or criminal misuse of public funds, depending on your opinion, has just been rejected although no doubt it will be back tomorrow in a different form.  Regardless of whatever measures are taken I am certain that more banks will fall.

So, are my savings safe?  They can be with a few different techniques.  Read my earlier posts How to get 100% protection on savings and Are my savings safe to see how.

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Kaupthing edge

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.


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Are your savings safe?

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.