Now that we are in 2011 it should be a fair enough assumption that the bank failures we saw back in 2008 have been relegated to history, but European and British banks are still facing various ris
Now that we are in 2011 it should be a fair enough assumption that the bank failures we saw back in 2008 have been relegated to history, but European and British banks are still facing various risks this year. While bank failures are rare and the authorities are unlikely to allow it to happen, you should know what level of protection your savings have.
European banks
At the end of November, a Financial Times editorial talked about the return of the credit crunch for Eurozone banks as those in the peripheral countries ?face a painful credit squeeze as borrowing costs soar?. The Bank of Portugal also warned that failure to consolidate the public finances would put the country?s banks in danger and said their dependency on the European Central Bank (ECB) for their borrowing needs was ?unsustainable? over the long-term.
In December the ECB?s Financial Stability Review advised that Eurozone banks remain vulnerable to both the effects of the Eurozone debt crisis and a slowdown in the economy. There is ?a potential for further adverse feedback effects between public finances and the financial sector?, the report said.
Banks are still reluctant to lend to each other, particularly to countries like Greece or Ireland. While the larger European banks are more profitable than they were six month ago, earnings are still at low levels and profits will not return to their pre-crisis levels.
The report also said that a few banks are still reliant on low cost ECB loans and that ?action is needed by the responsible authorities in the form of restructuring, de-risking and, where necessary, downsizing of the balance sheets of such firms?.
Later in December, chief economist of Citigroup bank and a former member of the Bank of England?s Monetary Policy Committee, Willem Buiter, warned that the ?game of chicken? being played out between the ECB and Eurozone governments could have serious consequences for Europe?s banks and that ?we could have several sovereign states and banks going under? This is a combined sovereign and banking crisis and that is a poisonous cocktail?.
Europe?s bank face another round of stress tests this year, which officials say will be more rigorous than last year?s, which have been criticised for not being tough enough. There have also been suggestions that holdings to potentially risky sovereign bonds were understated. Two of the big Irish banks which passed the tests have since encountered trouble to the point where they will probably end up majority owned by the Irish government.
British banks
British banks are also exposed to European sovereign debt crisis and are also facing funding hurdles this year.
The Bank of England?s (BoE) December Financial Stability Report calculates that the UK?s four largest banks are facing losses on consumer debts of ?100 billion if write off rates return to their pre-crisis average plus ?150 billion if losses on bad debts reach levels seen in the early 1990s recession. This is ?80 billion more than the banks have themselves forecast. Any extra impairments would ?be a further drain on banks? profits?.
While this is manageable, the report points it is only one of the risks banks are facing. The Eurozone crisis could have a huge impact on British banks ? they have ?210 billion exposed to Spanish and Irish debt, about 75% of total capital.
Lloyds Bank has already effectively written-off over half its outstanding loans to Irish borrowers, after seeing a “further significant deterioration in market conditions” there.
2011 looks like it may be a tough year for British banks. If any do get into serious trouble however it is fair to assume the BoE will step in to support them. Nonetheless, it does raise their risk level for investors and depositors ? and at a time when depositors are not being rewarded for the risk as interest rates look set to remain on hold until later in the year.
Deposit protection
Whether it is your cash savings, investments or insurance policies, you should always establish what level of protection you have should an institution fail.
Starting from 1st January this year, new rules in the European Economic Area (EEA) ensure that all the separate national compensation schemes provide bank deposit protection of up to ?100,000. Savers would also receive money back faster, within seven days being the target.
This means that the UK?s Financial Services Compensation Scheme (FSCS) has increased its limit from ?50,000 to ?85,000, per person per banking group.
The UK offshore centres are not part of the EEA and nor are they covered by the UK scheme. Instead they have their own schemes. Maximum compensation in the Isle of Man is ?50,000 of net deposits per individual. There is no guaranteed minimum compensation and no time limit for payment of compensation. The size of compensation and the timing will depend upon the size of the deposit taker which fails. Guernsey and Jersey also offer compensation of up to ?50,000 and aim to pay it within three months of a bank failure.
Today many savers with larger cash deposits have spread them out over more than one bank so that every Euro or Pound should be protected in the worst case scenario. Others have opted to move capital into arrangements which provide a higher level of investor protection than banks can offer. For example Luxembourg offers one of the best investor protection regimes in Europe – its state controlled protection law is designed to provide maximum security to investors without limit. If you have an investment bond issued by a Luxembourg regulated insurance company, your investment assets are completely protected should the insurance company fail.
For advice on asset protection and reassurance that your money is protected as much as possible, consult a professional and regulated advisory firm such as Blevins Franks Financial Management Ltd.
By Bill Blevins, Managing Director, Blevins Franks
22nd December 2010
