How safe is cash in a bank beyond UK regulation?

From Times By Patrick Hosking

A reader called the other day. Were her savings 100 per cent safe, she wanted to know? She had her nest-egg invested with Icesave, a savings product offered by Landsbanki, the Icelandic bank.

The answer ought to be an emphatic and unambiguous “yes”. Icesave is operated by the UK branch of Landsbanki and is heavily promoted to British savers as a perfectly safe, conventional bank account. Two hundred thousand Britons have plunged more than £5 billion of their savings into it, attracted by high rates of interest.

Nine months after the Northern Rock panic and in the week that the Chancellor announced plans for a sparkling new depositor protection scheme, it seems unthinkable that there could still be any ambiguity over the guarantees provided to savers. But the facts are not clear for this and other non-British banks.

Icesave tells depositors that the first £35,000 of their savings is 100 per cent protected – “the same as every FSA-regulated bank and building society in the UK”.Well, up to a point. In the unlikely event of Landsbanki failing, Icesave depositors would have to claim the first €20,887 (£16,500) of their losses not from the UK’s Financial Services Compensation Scheme (FSCS) but from a deposit protection fund run out of Reykjavik.

After several days of prodding and digging, I have, finally, ascertained the vital statistics of this fund, the Depositors’ and Investors’ Guarantee Fund. It describes itself, not very accurately, as “prefunded” but actually has £88 million in the kitty. That’s to cover deposits totalling £13.6 billion, 154 times as much.

In theory, the fund can have a whip-round from other member banks in the event of a default. In theory, it can borrow, though who from is not made clear. In theory, the Icelandic Government would, I am told, be obliged under a European Union directive to step in to fund any shortfall, although I cannot find any explicit written guarantee of this. Iceland is not a member of the EU.

In practice, in the unlikely event of Landsbanki failing, it’s quite possible that other Icelandic banks would be in similar difficulties and in no position to chip in. In practice, the Icelandic Government might struggle to find the money in the event of a big failure. The total deposits covered are twice the country’s entire GDP.

Iceland is a tiny economy with a population smaller than Coventry’s. It is difficult to imagine Icelandic taxpayers, at present facing a nasty recession, rampant inflation and a currency on the skids, willingly shouldering massive tax hikes to bail out British savers.

It is a bit like relying on a pocket handkerchief as a safety net for an elephant. Very probably, the elephant will never fall. Very probably, the elephant will not be allowed to fall. Only depositors themselves can say whether the extra slither of interest offered by Icesave, which frequently appears at the top of best buy tables, is worth the anxiety.

There is nothing unusual about the lifeboat fund having little in the kitty. Neither does the FSCS. The difference is that, in extremis, the British Government can print pounds to bail out UK depositors. Reykjavik cannot. Moreover, no one wants to debate this. The FSCS tells depositors of any UK branch of a bank based in the European Economic Area, including Iceland, that their savings are “protected”, but it does not say by whom. Icesave accuses me of being alarmist, jingoistic and indulging in absurd hypotheticals.

Meanwhile, a very senior British regulator I asked about it replied: “You wouldn’t really expect me to know the detail of the Icelandic deposit scheme, would you?” Well, yes, I would, actually, given the fragility of the Icelandic economy and currency and the army of Brits piling into Icesave. It is precisely these low-probability, high-impact events that regulators are supposed to weigh up and, if necessary, guard against.

At the very least, depositors in this, and other British branches of non-EU banks deserve more clarity and information – from Icesave, from the Icelandic Government and from the FSCS. Ordinary depositors should not have to spend days trying to get at the facts.

Landsbanki is highly rated and there is no reason to think that it could go wrong. But if it were to go wrong, things could get very messy. Because of the ambiguity, the pressure would be on British taxpayers and British banks to come to the rescue. That cannot be right for a bank over which the British authorities have no supervisory power.

— Homer Simpson once tried to steal used cooking grease from the kitchens at Springfield High to make biodiesel. In a bizarre example of life imitating art, those enterprising people half-inching the nation’s drain covers and church roofs seem to be diversifying and following his example.

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