Are Your Savings Safe?

The FSCS compensation limit for bank deposits could be increasing soon. In the meantime, those concerned may want to take a look at the current rates being offered by NS&I (see below).

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An easy question. How much of an individual’s deposits with an authorised deposit-taking institution is covered by the Financial Services Compensation Scheme (FSCS)?

A. £50,000

B. £75,000

C. £85,000

D. €100,000

Yes, £85,000, most people seem to know this (so £170,000 for a joint account).

The last time it was increased however, was 30 January 2017 and that increase was arguably not a real increase at all.

At the time the UK was still a member of the EU and therefore subject to a €100,000 limit under the European Deposit Guarantee Scheme Directive.

Back in December 2010 the FSCS limit had been set under the same Directive at £85,000 to reflect the then €/£ exchange rate. Just over four years later, the limit was cut to £75,000 because of sterling’s relative strength.

After the Brexit vote weakened the pound, the limit was restored to £85,000 in January 2017. At current exchange rates is could be £88,000.

Thus, its arguable today’s FSCS deposit limit is unchanged from its level of over 12 years ago.

Had it been index-linked to the CPI since December 2010, it would now be around £120,000.

Last week both the Governor of the Bank of England and the Chancellor spoke about the potential need to raise the deposit protection limit, although neither hinted at a new figure.

The driver for their comments was a lesson learned from the demise of SVB (see footnotes).

The US equivalent of the FSCS, the Federal Deposit Insurance Corporation (FDIC) offers $250,000 (about £200,000) protection, but as SVB crashed the FDIC was forced to say it would give full protection to all SVB’s depositors. In part this reflected SVB’s unusual deposit base, 93.8% of which was uninsured according to S&P.

Those exposed depositors, many in the Silicon Valley venture capital community, were able to withdraw their funds rapidly once worries about SVB started circulating. The speed at which both fright and flight spread explain the musings of Messrs. Bailey and Hunt.

The UK’s last experience of a bank run was Northern Rock, back in 2007. In the sixteen years since, the world of banking and communication has changed enormously. A UK bank run today would be instant news and the queues outside (any remaining) branches would be replaced by a deluge of mouse clicks. Everything would happen that much faster and the bank’s coffers would drain that much quicker.

In theory, the higher the depositor protection, the smaller would be the withdrawals and the greater the chance of bank survival, even if that meant a weekend shotgun takeover (see HSBC and SVB UK or UBS and Credit Suisse...and now JP Morgan and First Republic Bank). The downside is that deposit insurance is not free and somebody (the banks and ultimately their customers) must pay for it.

Comment

Any FSCS deposit protection increase will take time to work through because the big banks will be as unenthusiastic as ever about the idea. Ironically, as the problem of SVB in the US demonstrated, it may be that the official cap is irrelevant and that, in a large enough crisis, all affected deposits are guaranteed.

It's worth noting that during the banking crisis starting with Northern Rock in 2007, then continuing in 2008 with Bradford & Bingley, Heritable Bank, Icesave, Kaupthing, Singer & Friedlander and London Scottish Bank, that the FSCS stepped in to protect all depositors in full, with the Treasury guaranteeing deposits in excess of the then limit of £50,000.

Should another big name fall over, I can't see why they would not step in again, however in 2011, The Southsea Mortgage and Investment Company failed with just 270 savers.

14 of those individuals had more than £85,000 at the bank and were not fully covered so had to go through the insolvency process to try to recover the rest.

Anyone with concerns over the limits and would prefer to avoid the headaches associated with managing multiple deposits may reconsider accounts offered by NS&I.

As I have noted above, the deposits with NS&I are backed by the treasury, and as such, no need to limit yourself with the £85,000 limit.

Their Direct Saver which is easy access, is paying 2.85%, maximum £2m per person and their Guaranteed Growth Bond is paying 4% which is a 1 year fixed, max £1m per person.

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Footnote: SVB & Credit Suisse

Background

The failure of Silicon Valley Bank (SVB) on 10th March, caused widespread market reaction, with shares in the financial sector seeing falls across the US, UK and Europe.

Steps to reassure markets, including the announcement in the US that all depositors would have their deposits returned in full, and the UK Treasury orchestrating the sale of SVB's UK subsidiary to HSBC, had a calming influence on initial concerns of a contagion effect.

Additionally, shares in Credit Suisse fell significantly on 15th March, on the back of its statement concerning issues with its financial reporting. This led to further disquiet, although the Swiss Central Bank sought to reassure markets by extending a 50bn Swiss franc loan to Credit Suisse.

What caused SVB to fail?

The causes of the failure are both unique and to some degree associated with the regional nature of US banking.

However, broadly speaking, SVB's customer base was focused on the technology sector.

Tech sector growth in volume and value, particularly during the last couple of years, saw SVB build up its deposit base, which it used to purchase US Treasuries and other sovereign bonds.

As the Federal Reserve hiked interest rates in an attempt to manage inflation, the value of those bonds fell.

Customers also sought to draw on the war chests they had built up, to avoid high debt costs, leaving SVB scrambling to raise money to meet its obligations. When news spread, the situation quickly spiralled and caused a run on the bank.

US regulatory authorities stepped in, shut down the bank, and took control of customer deposits. They quickly announced that all deposits would be returned in full.

What about Credit Suisse?

The bank has faced difficulties in recent years, including claims of money laundering, and posted losses in 2021 and 2022. Sparked by weakness in the bank's reporting systems, its largest shareholder announced that it would not buy further shares in Credit Suisse.

This encouraged other customer withdrawals.

The Swiss Central Bank's announcement that it would provide Credit Suisse with funds up to 50 bn Swiss francs to strengthen its liquidity, and its reminder of the strict regulatory regime that exists in the country, have acted to reassure investors that this is a one-off. Markets reacted quickly to the news, with some bounce back in European equities.

Why has it had a wider effect?

The failure of any part of an industry always creates ripples, and SVB's demise was the largest failure of a US bank since 2008.

It was compounded by the liquidation of another tech-focused lender, Silvergate Bank, in the days before SVB, and by the subsequent failure of Signature Bank. Since then, we have also seen San Francisco-based bank, First Republic, shored up by injections of capital from 11 large US lenders.

They do however appear to be isolated incidents and there does not appear to be a systematic risk...yet!