Bank Safety: Four Months On

by Szu Ping Chan on 06 February 2009  |  41 comments
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It may be four months since the Icelandic banks went bust, but how safe are your savings now? Here's a full update, including latest CDS ratings.

This time last year, a little known Icelandic bank called Kaupthing Bank launched several online savings accounts in the UK through its UK arm, Kaupthing Edge. The bank offered market leading savings well above 6%, and joined fellow Icelandic bank Landsbanki in taking the UK savings market by storm.

Eight months on, during two unassuming mornings in early October, both banks plunged into administration, leaving millions of UK savers in limbo.

Thankfully, Mr. Darling came to the rescue, guaranteeing all Icesave deposits, and successfully overseeing a deal which saw rival ING take over savings from Kaupthing Edge and Landsbanki owned Heritable Bank.

Four month fallout

Personally, it's hard to believe that all this took place just four months ago.

Amid the panic which ensued, many savers flooded their money into government-backed National Savings & Investments (NS&I) and even state-owned Northern Rock. Some of Britain's best-known high street names hit murky waters, and institutions such as HBOS found themselves in need of rescue.

Things have somewhat calmed down since the banking bedlam, and with the base rate now at fresh lows of 1%, right now people are probably more concerned with potential returns than bank safety.

However, for those curious to find out how their bank is doing, here's a rundown of the current situation:

Measuring risk

One way we've measured the banking crisis is by looking at credit default swaps (CDSs), and in Spot Banks Before They Go Bust, I explained the usefulness of CDSs in terms of measuring risk.

In short, CDSs are a type of debt insurance, guaranteeing a holder's money will be repaid in the event a bank/company goes bust. So, the riskier a bank, the more expensive it is to insure its debts, and the higher its resultant CDS `score'.

CDSs are measured in basis points (one hundredth of a percentage point). Most UK banks hover around the 100 mark, which is pretty safe.

Above that, anything over 1,000 gets me shifting in my seat. Beyond 2,000, and the alarm bells start ringing. To put things into perspective, CDSs in Icelandic banks were trading near 3,000 basis points before they went bust.

For those curious about what's going on in the world of CDSs at the moment, here's a list of Britain's most popular banks and building societies, which banking group they belong to in relation to the Financial Services Compensation Scheme (FSCS), and their CDS ratings:

Data correct as at 12pm, 6^th February 2009. Source: Bloomberg.

As you can see from the table above, there's not much to choose between the big high street banks. ING Direct is currently the market's safest bet, while HBOS's hero Lloyds TSB takes second spot.

The Irish banking system has also hit troubled waters in recent times, with Ireland's third largest lender, Anglo Irish nationalised last month. As a result, Irish banks have been deemed less safe than their English equivalents, with CDSs hovering around the 400 mark.

Barclays, which saw its shares jump after an open letter reassured investors of its continued good health, saw them plummet down again after rating agency Moody's cut its credit rating - a sign that the bank is not out of troubled waters yet.

As a result, Barclays is also deemed the riskiest of the `big five' banks, with a current CDS rate of 175.

Bringing up the rear is ICICI. Rumours were rife last year that the Indian bank could follow in the footsteps of its Icelandic counterparts, so much so that the bank plastered its credibility all over its website to try and reassure nervous investors not to pull money out.

Four months on, and the high interest rates they offer still suggest they are looking to shore up their balance sheets. However, CDSs in ICICI have halved since October, and for now at least, the market thinks it's reasonably safe bet.

Building blocks

Amid the crisis, we also need to remember that it isn't just the banks that have changed their tunes. Several building societies were also hit hard, with many forced to merge to survive the economic downturn.

One notable victim of the credit crunch was Barnsley BS, which was taken over by rival Yorkshire BS after it revealed it had some £10 million invested in the melted Icelandic banks.

Blemished balance books also got both Derbyshire and Cheshire building societies into trouble, and both were taken over by giant Nationwide in December.

Last year, Scarborough BS also announced its merger with rival Skipton. The predicted impact of house price falls and the recession led Scarborough to approach its rival in order to secure capital resources.

Elsewhere, mutual minnow Catholic BS also merged with high street name Chelsea BS and, just last month, powerhouses Co-Op and Britannia announced they were to merge, forming what will be a super-mutual.

In the continuing economic downturn, you can probably expect more of these mergers to happen, without the normal associated windfalls. After all, in a downturn, although it pays to keep your friends close, in these cases, it also pays to keep your enemies closer.

For now, there is no perfect solution as to where to put your money. But save smart, and keep within the FSCS's compensation limits, and you have a pretty good formula in my book.

More: Banks vs. Building Societies: Which Are Safer? / Spot Banks Before They Go Bust

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