Is Your Money Safe In A High Street Bank?

humagaia By humagaia, 11th Apr 2010 | Follow this author | RSS Feed | Short URL
Posted in Wikinut>Business>Investment

"Moral Hazard" - the collapse of a bank - and your savings in a high street bank.

"Moral Hazard"

"Moral Hazard" is the concept that when things go wrong a penalty must exist for those who take higher risk in anticipation of higher return. It is this concept that means that I have no sympathy for those unfortunate people that placed their savings with offshore banks such as those of Iceland.
Suppose the Government guaranteed all deposits in every type of Financial Institution. Depositors would rush to get the highest return whatever the risk.
The result: the sensible investor who stayed with lower-return, lower-risk investments would end up subsidising the reckless investor who placed his money for maximum return regardless of risk. That's why no Government would or should give an across-the-board complete guarantee of all depositors' money.
So just how safe is your money in your local high street bank or building society? As recent events have shown the Government did not allow any major bank or building society to fail. As long as you stick to the major banks and building societies your money should be safe.
But, in the past, smaller banks have been allowed to fail. Six went bust in 1990-1991 alone. These included BCCI, British & Commonwealth, Edington and Chancery. So beware! Going for an extra 1/2% return could cost you dearly if you do not take advantage of the rules surrounding the FSCS - the Financial Services Compensation Scheme. This scheme was strengthened because of the recent banking crisis. Northern Rock and Bradford and Bingley managed to get themselves into so much liquidity problems that they were effectively taken over by the Government - with our money. HBOS merged with Lloyds because of the difficulties they had got themselves into. Unfortunately for Lloyds this caused them difficulties in turn - to the extent that the Government had to loan to them a total of £20billion. Royal Bank of Scotland also fell foul of their investments in sub-prime US mortgage loans and had to go begging to the Government for £20 billion themselves. And all this was underpinned by our tax pounds. But you will note that none were allowed to actually go bust.
The track record of building societies is better. No depositor has lost money in recent times. When a building society has found trading conditions adverse to their capabilities they have been swallowed up by their larger competitors. But again there is no guarantee that this will always happen in the future. The Dunfermline Building Society fell fowl of the banking crisis in 2007-8 and its' good assets were transferred to Nationwide. However, the Dunfermline was then put into administration so that its' bad debts could be monetised over time.
The Financial Services Compensation Scheme (FSCS) has been in place for some time and was strengthened in October 2007 following the Northern Rock crisis. Before that 100% of the first £2,000 of deposits and 90% of the next £33,000 were protected. On 1st October 2007, it was extended to cover the full amount of the first £35,000 per UK bank, building society or credit union, per customer. Since 7th October 2008, the threshold has covered the first £50,000 per bank, building society or Credit Union. However, only net deposits are covered. This means that if you have £50,000 deposited and also have a £20,000 loan with the same bank, then only the net amount of £30,000 would be compensated.
Any informed investor should therefore ensure that any loan should be with a bank etc., that does not hold their savings. They should also split their deposits between different banks, building societies etc., so that no more than £50,000 is held within any one institution. Married couples should seriously consider splitting any joint accounts so that there is no reason in the future for a Government to determine that a joint account is one customer and not two.


Real risk does exist in the banking system. It provides the element of "moral hazard" essential if the wise are not to be penalised by being forced to bail out the foolish. So stick to the tried and trusted names on the high street. And don't be tempted by higher returns offered by offshore banks unless you are prepared to accept the risks that this strategy involves.


Bank, Bcci, Bradford And Bingley, British And Commonwealth, Building Society, Chancery, Deposit Protection, Depositors Money, Deposits, Dunfermline Building Society, Edington, Financial Services Compensation Scheme, Fscs, Government Guarantee, Hbos, Higher Return, Higher Risk, Lloyds, Moral Hazard, Nationwide, Normal Hazard, Northern Rock, Penalty, Rbs, Royal Bank Of Scotland, Taxpayer Support

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author avatar humagaia
I am a grumpy old man with experience in many fields that I can write about including finance & investing, antiques & collecting, modern ceramics, software, books & education.& my grumps & gripes.

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