Northern Rock savers shouldn't worry

by Ed Bowsher on 10 February 2010  |  0 comments
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The unlimited guarantee for Northern Rock savers may end soon, but account holders shouldn't worry.

There are reports coming through today that Northern Rock's unlimited savings guarantee may end soon. As things stand now, the government has promised to fully compensate any Northern Rock savers if the bank went bust. Whereas if other banks went bust, savers would only be compensated up to a maximum of £50,000 - that money would come from the Financial Services Compensation Scheme (FSCS.) If today's reports are correct, Northern Rock savers will only be compensated up to £50,000 once a three month notice period has lapsed. 

So what? 

Northern Rock's competitors will be pleased by today's news. Especially the building societies. Many savers switched their savings to The Rock because they wanted complete safety and that's meant that the building societies have struggled to raise enough cash for lending to homeowners. 

We may also see some savers switch to National Savings as the government-backed savings institution will remain 100% guaranteed. 

What should savers do? 

If you're of a nervous disposition, then make sure you don't have more than £50,000 with any one bank. Then if a bank goes bust, you can be 100% sure that you'll get your savings back. 

You should also remember that some banks share a licence - for example, HSBC and First Direct. The £50,000 rule applies to one licence, so if you saved £50k with HSBC and £50k with First Direct, you would only get a total of £50,000 in compensation from the FSCS. 

That said, I think that many commentators place too much emphasis on the FSCS. Let's look at what happened during the 2008 financial crisis. All savers in UK-based banks were fully compensated for their losses by the government. The FSCS proved to be a sideshow because the government was very worried about confidence in the financial system. That meant all savers had to be compensated. 

It's my belief that the government would do exactly the same thing again should another bank go bust. The economic and political costs of doing otherwise would be too high. So if I had more than £50,000 in cash savings at Northern Rock, I wouldn't worry about leaving my money there - assuming, of course, that I was happy with the interest rate I was receiving. 

One final caveat: I'd be far less relaxed if I had money in an offshore account in somewhere like Jersey. Accounts in overseas tax havens weren't protected by the government in 2008 and I doubt things would be any different second time around.