Victoria Scholar gives investment advice
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The headline figures are terrifying, with Swiss bank Credit Suisse requiring a £45billion bailout to avoid going bust.
In a rare positive, so far UK banks have held firm. I’ve slammed the Bank of England in the past but it has worked hard to boost the strength of UK banks such as Barclays, Lloyds and NatWest.
It may even have succeeded. We’ll find out soon enough.
This doesn’t mean our banks are completely out of the woods. If they were, the Barclays share price wouldn’t have fallen 15 percent last week.
But there’s no need to panic. You can still sleep at night, provided you take one key step to protect your money.
A bank run is a terrifying thing, as anybody who remembers Northern Rock depositors queueing outside branches for their cash in 2007 will testify.
The problem is that if every bank customer wants their money back at the same time, the bank can’t pay them. Your deposit is not sitting in their vaults in a neat bundle with your name on it, waiting for you to pop in.
It will have been loaned out to generate an investment return for the bank.
So those desperate Northern Rock’s depositors were fooling themselves. The money wasn’t there. The bank duly went bust.
In the hugely unlikely your bank faces a run on its money, there is little point knocking on its door with a hopeful expression.
Your local branch probably closed ages ago and even if it’s open, by the time you turn up there’ll be a mob outside, the doors will be bolted and the manager will be under police protection.
When it comes to the crunch, it’s down to the government to save the day.
During the Northern Rock crisis, only the first £2,000 of cash savings had full state protection.
Although 90 percent of the next £35,000 was also covered, sums above that were in genuine danger.
In 2007, Chancellor Alistair Darling prevented total melting banking meltdown by upping the protection limit to £85,000.
If that had been in place before the run Northern Rock, the stricken bank may even have survived.
Not that it deserved to.
That £85,000 limit is intact today under the government-backed Financial Services Protection Scheme, or FSCS.
As its website comfortingly states: “If the financial firm you’ve used has gone out of business and can’t pay your claim, we can step in to pay compensation.”
Which is great, unless you have more than £85,000 in savings. Plus there’s also a catch that you need to know about.
The average UK saver has £17,365 in the bank, so the FSCS limit is more than enough for most of us, but it’s worth noting that its protection is shrinking by the year.
That £85,000 limit has not increased in 16 years. If it had risen with consumer price inflation, it would now be £131,414.
Effectively, we’re getting £46,414 less protection than we were.
The good news is that this £85,000 limit applies per bank account (and doubles to £170,000 for accounts in joint names).
If you have larger sums in savings, you can protect them all by spreading them across different institutions.
Now here’s the catch. Some of the bigger banks have a number of different brand names under the same licence.
That leaves savers vulnerable because the £85,000 limit only applies per banking licence. For example, Halifax and Bank of Scotland are both owned by Lloyds Banking Group under the same banking licence.
If you saved £50,000 with Halifax and £50,000 with BoS, then £15,000 of your money would have no protection.
If you hold more than £85,000 with multiple banks, building societies or credit unions, the FSCS suggests you check if they share a banking licence by searching the financial services register.
I’ve just tried doing a search and couldn’t make head nor tail of the results. So you might need to do some rooting around yourself.
Contact your bank if worried. If worried, better do it sooner rather than later, in a panic.
Just remember that money invested in shares is not covered by the FSCS. That’s down to you.
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