Should bank failures worry you? What keeps your cash safe

Britons will have been reading news of bank failures with a sense of dread – and a more than a little deja vu from the 2008 financial crisis.

But worries of another UK financial crash are overblown, experts think – and consumers are being reassured that there is no immediate risk to their savings, which is protected by the Financial Services Compensation Scheme, as we explain below.

Two banks have needed bailouts in the space of just a few days – Switzerland’s Credit Suisse and Silicon Valley Bank, from the US. The former has been bought out, while the latter is on life support as authorities hunt for a buyer.

But banks failing at home and abroad is what caused the last financial crisis, which led to tens of thousands of Britons losing jobs, money and homes.

The news of Credit Suisse and Silicon Valley Bank conjured up 2007 photos of Northern Rock customers queuing to withdraw cash from the doomed lender – or UK staff at Lehman Brothers sobbing in the street as they lost their jobs.

It is understandable that many households are now worried a repeat is on the cards.

What has happened with bank failures this month?

The news broke over the weekend that Switzerland’s biggest bank, UBS, had bought its former rival Credit Suisse in a hurried deal designed to prevent a banking implosion. 

Last week the lender appealed to the Swiss Government for help after discovering a ‘material weakness’ in its finances.

In response, the bank’s top shareholder, Saudi National Bank, which has a 9.9 per cent stake, said it would not provide fresh funding to Credit Suisse.

The revelation spooked investors and sent Credit Suisse shares into freefall.

Despite a lifeline from the Swiss central bank of $54billion (£44.1billion), customers continued to pull their deposits. At one-point outflows were over 10billion Swiss francs a day (£8.8billion).

The situation led the Swiss Government to broker the deal between UBS and Credit Suisse in the hope of containing the crisis.

Last week, US firm Silicon Valley Bank also ran into difficulty. In the US, SVB is being run by the Federal Deposit Insurance Corporation while it hunts for a buyer. In the UK, SVB’s operation has been bought by HSBC.

Are my savings money safe as a UK bank customer?

Yes. The good news for UK banking customers is that financial firms here are safe – at least, as far as it is possible to tell. 

Even better, UK regulation brought in after the last financial crisis not only forces banks to be more resilient, but savers also have FSCS protection if a bank does collapse.

The Financial Services Compensation Scheme protects up to £85,000 per individual in each individually licensed bank or building society. Some banking brands share licenses, so check if any of yours are connected.

The sort of banks that have failed so far this year are not high street banks, which Britons use for their current accounts, but business banks.

So affected customers are businesses, a small number of incredibly rich investors and other banks, not the general public. 

These banks have also not crashed and burned. One has been bought, while the other is likely to be bought. 

Now, there is a small wildcard chance that bank could fail in the UK as a result of other banks collapsing. 

But that would be due to consumers panicking, experts think, and rushing to withdraw their cash – similar to the run on Northern Rock in 2007. This is unpredictable, but also unlikely.

Are other banks at risk of collapsing?

In short, no, or not immediately. Christine Lagarde, president of the European Central Bank, said that the Eurozone’s banking system is ‘resilient, with strong capital and liquidity positions’.

But while it seems that a mass bank collapse has been avoided, Shane Oliver, head of investment strategy & chief economist at investment firm AMP Capital, told Bloomberg on Monday that we aren’t ‘out of the woods yet’. 

Oliver said the rise in interest rates is the common thread between the added pressure on Credit Suisse and the collapse of regional banks and Silicon Valley Bank.

Central banks have also said they are ready to provide additional capital to banks to boost confidence and ensure they can continue lending.

It is worth remembering that this is not 2008 – when the problem was large amounts of assets sitting at the heart of a banking and easy credit boom were close to worthless.

Today, banks are much better capitalised and the excesses of the pre-credit crunch era haven’t taken place.

The UK financial regulator requires banks to have financial buffers in place for hard times, and to have plans in place so any collapse happens in the kindest possible way to customers. 

If the worst happens and consumer banks do fall into difficulty, there are measures in place to protect our money. 

What do bank failures mean for my savings? 

The Government-backed Financial Services Compensation Scheme exists to protect you when a regulated financial firm goes under.

The FSCS guarantees refunds of up to £85,000 per person in the case of a bank, building society or credit union failing. That rises to £170,000 for joint accounts.

If your bank, building society or credit union goes bust, you should get your savings back, so long as you meet certain conditions.

The provider holding your cash must be authorised by the Financial Conduct Authority and covered by the Financial Services Compensation Scheme. They should advertise clearly if they do have this coverage. You can also check on the FSCS website.

Protection is across all accounts held within the banking group, not per account, so watch out for banks with a number of brand names. For example, First Direct is owned by HSBC and Royal Bank of Scotland is another brand under the NatWest bank.

You may get protection of up to £1 million for up to six months if you have a temporarily high balance.

You can use the FSCS’s protection checker tool to check if your money is protected in your bank, building society or credit union accounts.

What do bank failures mean for my mortgage?

If your bank or building society goes bust you will not have your mortgage cancelled or lose your home. Your debt to the lender still stands, as does its charge over your home.

The administration process would see that debt sold onto another bank or building society, or potentially an investment firm, and you would then owe them the money.

If you ever end up as a mortgage borrower with a bank that goes bust, you should be given clear advice on what to do and should continue to make your monthly payments as normal.

Does the Credit Suisse failure mean anything for your finances now?

The short answer (unless you are an investor holding Credit Suisse AT1 bonds or shares) is no, not directly.

However, we could see an indirect impact when the Bank of England’s Monetary Policy Committee meets to set its base rate.

Before last week markets had embraced the chance of a Bank of England base rate hike of 25 basis points, taking the benchmark rate to 4.25 per cent.

But the collapse of Silicon Valley Bank, broader problems within regional US banks and the emergency takeover of Credit Suisse could lead the Bank of England’s Monetary Policy Committee to hold off when it meets today (23 March).

Central banks globally will now be concerned that economies will be more sensitive to interest rate hikes, and may not want to risk falling back into a recessionary outlook and further market chaos – even as inflation remains well above targets.

This would feed through to mortgage and savings rates with the former staying at their current levels or falling slightly and the latter sticking where they are.

Katharine Neiss, chief European economist at investment firm PGIM Fixed Income, said: ‘Having started on its rate hiking cycle earlier than a number of other central banks, the Bank of England is in an advantageous position at this juncture. As such, I expect the Bank to be on hold at its next meeting.’