How safe are your savings in a European bank?

8th June 2012

Many European banks run branches on the British high street, but not all benefit from the British safety net should the banks go bust.

Currently, 50,000 UK savers with Bank of Cyprus are not covered by the Financial Services Compensation Scheme (FSCS). Under this Government-backed scheme, if your bank fails, you can reclaim a maximum of £85,000. For investments, the limit is lower, up to a maximum of £50,000.

Instead, UK customers with savings in any of the four UK branches of the Bank of Cyprus are covered for up to 100,000 euros by the Cypriot Deposit Protection Scheme.

Based on today's exchange rates, 100,000 euros is worth around £80,870, a lower limit than the equivalent UK scheme and likely to fall further if the troubled euro weakens.

The Cypriot scheme also relies on the government in Cyprus covering the cost should the Bank of Cyprus fail. BBC coverage warned today that Cyprus appears to be edging closer to requesting a financial bailout as its banking system is intertwined with Greece.

Now savers can take comfort from the announcement last week by the Bank of Cyprus that it is taking steps towards offering UK savers protection under the UK rather than the Cypriot compensation scheme.

The Nicosia-based bank has proposed transferring its UK banking business to a UK subsidiary, and received agreement in principle from the UK regulator, the Financial Services Authority (FSA), as reported on Wednesday by The Daily Telegraph.

Subject to formal FSA authorisation, from mid-July the newly-created Bank of Cyprus UK Limited will be regulated by the FSA, and "all eligible deposits in all currencies will be protected by the UK FSCS up to £85,000 per customer".

Before rushing to withdraw any deposits from British branches of European banks, remember that many others are already covered by the FSCS.

For example, Spanish bank Santander stepped in to buy previously British stalwarts Abbey, Alliance & Leicester and the savings arm of Bradford & Bingley. The parent company Santander Group also owns Banco Santander, the largest bank in the euro zone and a cornerstone of the troubled Spanish economy. However, the British arm of Santander is run as a separate business, with its own banking licence.

A Santander spokesman explained: "Santander UK plc is completely autonomous from its Spanish parent company. This structure acts as a firewall to prevent problems within one part of the group spreading to other units in the event of financial difficulties. 

"Santander also operates a "firewall" approach to borrowing and lending in the markets it operates in. This means that money raised in the UK stays in the UK ."

Santander UK is fully covered by the FSCS and therefore offers the same protection as other high street banks.

Similar to Santander, the Bank of Cyprus is aiming to set up a separate UK subsidiary. Commentators on coverage in The Daily Telegraph were irritated about who would foot the bill, should the Bank of Cyprus subsequently fail.

Michael C Feltham complained that "now Cyprus seeks to export its debt obligations and dump it on the UK taxpayer", while Countrollo said "yet again, some devious foreigners are manipulating the system to Britain's detriment, and as ever we pay", and 3Spartan said: "Another headache winging its way over for British taxpayers".

The FSCS may be funded by the financial services industry through an annual levy, but its cover would not extend beyond customers of the UK subsidiary to wider Cypriot debts. Hopefully protection under the UK scheme will help British customers sleep more soundly at night.

Otherwise only three European banks are still in a situation where should they go bust, UK customers would have to apply to a compensation scheme based in the bank's home country.

These are Triodos Bank and ING Direct, both of which are covered by the Dutch compensation scheme, and another Cypriot bank, Marfin Laiki, according to financial information provider Moneyfacts. All three offer savers protection up to 100,000 euros.

 

More on Mindful Money:

How to survive the Eurozone apocalypse

Buffett & Soros weigh into the eurozone crisis

Who's to blame for the Eurozone crisis? We all are

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