Tuesday 7th October 2008
by Bob Bardsley
Know Your Money Editor
It may seem like you no longer have to turn to the pink pages in order to see headlines about banks these days - barely a week goes by without a financial institution announcing a buy-out or liquidity crisis. Recent parliamentary debates have focused on how this can affect accountholders. One example of this is the fact that the Financial Services Compensation Scheme (FSCS) pays out separately for accounts with different providers, but will only cover the combined total of savings held with different organisations which operate under a single Financial Services Authority remit.
But a more pressing concern for many people might be to worry about exactly how safe any one bank or building society is - just how can you judge whether your money is being paid into an account that will still be accessible a week later? And for the maximum chance of safeguarding your funds, should you place them under the care of a bank, a building society, or an overseas financial services provider?
Credit Default Swaps
Credit Default Swap - or CDS - ratings give an estimate of how safe a financial institution is, based on the interest rates at which it is expected to borrow from other banks or building societies. The turbulent times faced by many financial services providers in the UK may have helped to raise consumer awareness of interbank lending - when one bank borrows from another - but many people may remain unaware that the interest rate incurred on such lending is often used to judge how safe an institution is.
The ratings are typically quoted in basis points - hundredths of a percentage point - and relate to the interest paid on each unit of currency borrowed. For example, a CDS rating of 125 would mean a financial organisation is expected to pay 1.25 per cent interest on its borrowing. On a £10,000 loan, that would equate to £125 of interest to repay each year. The higher the CDS rating, the more interest must be repaid - which is an indication that the lending bank has deemed the borrower to be of higher risk and could mean it is a less secure destination for any savings.
UK Banks
CDS ratings on October 2nd, from This is Money:
• Abbey - 124.199
• Alliance & Leicester - 149.69
• Barclays - 261.798
• Bradford & Bingley - 1,494.699
• HBOS - 353.299
• HSBC - 395
• Lloyds TSB - 193
• RBS/NatWest - 525
Perhaps unsurprisingly, Bradford & Bingley carries a relatively high CDS rating having recently been nationalised. While Abbey - part of the Santander group - has taken on its client base and product portfolio, much of its debt has been amalgamated into the FSCS. The Association of Mortgage Intermediaries, however, pointed out that this could leave the compensation scheme under considerable strain.
At the safer end of the scale, Santander-owned banks lead the way. Abbey rates as the safest financial institution in the UK, facing interest charges of less than 1.25 per cent on anything it borrows. Alliance & Leicester faces less than 1.5 per cent - and may also be considered as part of Santander after its shareholders voted in favour of acquisition by the Spanish banking group in September.
UK Building Societies
CDS ratings on October 2nd, from This is Money:
• Britannia - 335
• Nationwide - 280
This is Money carries ratings for two building societies in the UK, with Nationwide indicated as the safest on October 2nd in terms of its CDS ranking. However, it might be worth noting that the financial services provider merged with The Derbyshire and The Cheshire in mid-September after both reported facing financial difficulties. Although it did not suffer in CDS terms by early October, the deal could be one to watch for anyone considering putting funds in Nationwide.
Overseas Banks
CDS ratings on October 2nd, from This is Money:
• Allied Irish Bank - 146.699
• Anglo-Irish Bank - 401.299
• Bank of Ireland - 163.3
• ICICI Bank - 564
• Kaupthing Edge - 1,842.599
• Landsbanki (Icesave) - 1,674.4
Investing offshore might seem like the first step towards a high-rolling lifestyle of yachts and casinos, but there are no guarantees that overseas banks will remain immune from the same kinds of turbulence faced in the UK. The institutions listed above all have operations within the UK, meaning they could potentially be used as destinations for savings by Britons without too much trouble. But anyone with funds saved in Icesave accounts could face greater difficulty in obtaining their money after parent company Landsbanki was nationalised - a crisis reflected in the high CDS rating. This is Money advises that £16,170 should be protected under Icelandic regulations, with any surplus up to £50,000 falling under the remit of the UK's FSCS. But the issue might offer a cautionary tale to anyone planning on looking further afield to escape the credit crunch in the UK.
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