The credit crunch started in August when hundreds of thousands of US home owners defaulted on their mortgages.  Banks and investors across the world were left out of pocket and the US crisis shows no sign of abating. 
The Bank of England’s half yearly Financial Stability Report, published on 25th October 2007, said that the turmoil “has proved to be the most severe challenge to the UK financial system for several decades” and that it exposed “serious fragilities” within the ‘originate and distribute’ model used by many financial firms to parcel up debt.
British banks are vulnerable.  If, as a result of the credit crisis, they have to set aside capital against their exposure to mortgage-backed securities, leveraged loans and structured investment vehicles, they would face a bill of close to £150 billion.
The Bank of England is also concerned that banks may continue to raise funding through the structured credit market. The report warns that if they carry on with the old systems and fail to adapt their business models, confidence will return in the short term but with the risk of even greater turbulence in future. 
The report expresses concerns that there is evidence that banks are already dropping their standards again and making irresponsible lending decisions. 
The Financial Stability Report also signalled that first-time buyers and buy-to-let landlords are most likely to default on their mortgages in the months ahead.  First time buyers are currently paying 20% of their salaries in mortgage interest repayments.  They had to “stretch themselves more than would normally be the case in order to get on the housing ladder” and are therefore “particularly exposed”.  
The fact that banks can be “irresponsible” with money will come as a shock to those savers who consider the bank to be the safest place for their money. The run on Northern Rock may have been the first on a British bank for 140 years, but it has still made people reconsider their concept of banks as secure.  When you deposit money in the bank, the notes are not held in a safe deposit box waiting for you to withdraw them in future; instead the funds are used by the bank to carry out its business and generate revenue. 
Are your savings protected if your bank goes bankrupt or is unable to return your money for any reason?  Does your bank have a depositor protection scheme? It remains unlikely that a bank will collapse, but it is not impossible and the Northern Rock crisis proves that banks can and do suffer financial difficulties.   

UK savings
Savings in the UK have some protection under the Financial Services Compensation Scheme (FSCS).  Until mid-September the rules stated that if your bank could not afford to return your savings, the FSCS would give you the first £2,000 in full, then 90% of the next £33,000.  Just £31,700 of your savings was safe, regardless of how much was in the account. 
As a response to the Northern Rock incident, the FSCS was upgraded so that now the first £35,000 of your savings with a single institution is covered in full.  This is an increase of just 10.41%, even though inflation has risen by 150% since the £31,700 payout was introduced.
The Chancellor also guaranteed that Northern Rock savers would not lose a penny of their savings, and promised to review the compensation scheme further.
He has since launched a consultation on Britain’s rules for governing deposits.  He is keen for the savings guarantee to be increased to £100,000, but this proposal was not well received. Senior figures in the financial industry warned that such a move would be strongly resisted and possibly challenged in court.
The banks argue that they would incur significant insurance costs, which could lead to smaller banks and building societies closing their savings accounts or lowering the interest rates they offer customers.   Another possibility is that banks may be forced to place a large amount of money in a pre-paid scheme, in which case the significant cost could be passed on to savers. 
Others have complained that a high guarantee will just protect wealthy people – only around 1% of UK savers have savings of more than £35,000 – while the general public’s pensions funds have much less protection.

Offshore savings
Thanks to the Bank of England increasing its base interest rate five times in a year offshore banks are currently offering the highest rates we have seen since 2001.   The global credit crunch has also left banks in need of funds and the resulting competition between offshore banks for customers means we are seeing some very attractive interest rates.  Often to obtain these rates you need to deposit a minimum of £25,000.
However, banks in Jersey, Guernsey and the Isle of Man, even those which are subsidiaries of British banks, are not covered by the UK financial services compensation scheme.  This only covers British authorised banks and their subsidiaries in the European Economic Area (EEA) – the Channel Islands and the Isle of Man are not in the EEA.
Isle of Man – its Banking Business (Compensation of Depositors) Regulation 1991 offers protection of 75% of the first £20,000 per individual.
Jersey & Guernsey – there is no depositor protection at all.
Gibraltar – its Deposit Guarantee Scheme protects the lesser of £18,000 (or sterling equivalent of €22,000, whichever is greater) or 90% of qualifying deposits.

Investment capital
What happens if you invest your capital instead of depositing it in a bank?  Again, it would depend on the location of your investment bond.  Luxembourg offers excellent investor protection thanks to a government sponsored custodian scheme – it is the strongest investor protection scheme in Europe making Luxembourg the safest place to hold assets.
Provided the client invests in real assets, the Luxembourg structure offers complete segregation of clients’ assets from either the creditors of the investment firm or any of its custodian banks.  All assets must be held by a custodian bank approved by the regulator, to reinforce the segregation of policyholder assets from corporate assets and to prevent exposure to the investment firm’s credit risk.  The custodian bank must hold all these assets in separate custodian accounts, so they do not form part of the bank’s balance sheets and therefore are not exposed to its credit risk.   The only part that may be possibly exposed is the part of the portfolio which is left on deposit rather than invested.
The Isle of Man has an unfunded policyholder protection scheme which would struggle to compensate any major loss.  Dublin has no formal investor protection scheme.  
With such different rules in different jurisdictions, when choosing where to deposit or invest your savings, it pays to establish what protection your money will be offered.
 

See Our Comments......

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Our Comments:

It came as something of a shock to discover that any savings that we have over £35000, held in a British Bank, are totally at risk. We, like most other ordinary folk, believed that our banks were secure and our savings protected and although we ourselves did not have any monies deposited with 'Northern Rock' we do have friends and clients who did.

It was also a salutary moment when we realised that it was possible for the country itself to become bankrupt if the government were actually called on to guarantee all our savings against a run on the major British banks... Whew!!!!!! heady stuff but could happen if there is a repetition of the Northern Rock situation who, let's face it, are only a very minor financial institution.

This was a huge shock to the system and made us completely re-assess our saving strategy.

We have always considered property investment to be a safe bet in the long term, although always balancing the profit/risk equation against money placed safely in savings accounts at lower interest/profit. Now though we realise that it isn't safer in a bank at all (only the first £35,000) and so now more of our capital is going into bricks and mortar, and will continue to do so until the 'gold standard' guarantees come back into our banking system. (probably never). There is no doubt in our minds that buying land and property is the very best way to save for our future and there are still some great investment opportunities in Southern Tenerife.

Contact us now for information about low cost opportunities on complexes that are showing capital growth above the current average.:

email: info@wadyproperties.co.uk

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