Should bank failures worry you? What keeps your cash safe

The British will have read the news of bank failures with a sense of dread – and more than a little deja vu from the 2008 financial crisis.

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

Two banks have required bailouts in just a few days: Swiss Credit Suisse and US Silicon Valley Bank. The former has been bought out, while the latter is on life support while authorities look for a buyer.

But the failure of banks at home and abroad is at the root of the latest financial crisis, which led to tens of thousands of Britons losing jobs, money and homes.

News from Credit Suisse and Silicon Valley Bank conjured up photos from 2007 of Northern Rock customers queuing to withdraw from the doomed lender — or British Lehman Brothers employees sobbing in the street when they lost their jobs.

Understandably, many households are now concerned that a recurrence is imminent.

What happened to bank failures this month?

News broke last weekend that Switzerland’s largest bank, UBS, had bought its former rival Credit Suisse in a hasty deal to avoid a bank 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 largest shareholder, Saudi National Bank, which has a 9.9 percent stake, said it would not provide new funding to Credit Suisse.

The revelation shocked investors and sent Credit Suisse shares into a free fall.

Despite a $54bn (£44.1bn) bailout from the Swiss central bank, customers continued to withdraw their deposits. At one point, outflows exceeded 10 billion Swiss francs a day (£8.8 billion).

The situation prompted the Swiss government to broker the deal between UBS and Credit Suisse in hopes of containing the crisis.

Last week, the American company Silicon Valley Bank also ran into problems. In the US, SVB is being run by the Federal Deposit Insurance Corporation as it searches for a buyer. In the UK, SVB’s operation has been bought by HSBC.

Is my savings safe as a customer of a UK bank?

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

In fact, UK regulations introduced after the last financial crisis not only force banks to be more resilient, but depositors also have FSCS protection if a bank fails.

The Financial Services Compensation Scheme protects up to £85,000 per person in each individually approved bank or building society. Some bank brands share licenses, so check if yours is connected.

The kind of banks that have failed so far this year are not large banks, which the British use for their current accounts, but investment banks.

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

These benches also did not crash and burn down. One has been bought while the other is likely to be bought.

Now there is a small wild card chance that a bank in the UK will fail as a result of other banks collapsing.

But that would be because consumers panic, experts think, and rush to withdraw their money – similar to the run on Northern Rock in 2007. This is unpredictable, but also unlikely.

Are other banks at risk of failing?

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

But while it appears a massive bank collapse has been averted, Shane Oliver, chief investment strategy and chief economist at investment firm AMP Capital, told Bloomberg on Monday that we’re not “out of the woods” yet.

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

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

It’s worth remembering that this isn’t 2008 – when the problem was that large amounts of assets were central to banking and easy credit booms were almost worthless.

Today, banks are much better capitalized and the excesses of the pre-credit crisis era have not occurred.

The UK’s financial regulator requires banks to have financial buffers for tough times and plans to avoid bank collapse in the friendliest way possible for customers.

If the worst happens and consumer banks do get into trouble, steps are 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 company goes under.

The FSCS guarantees repayments of up to £85,000 per person in the event that a bank, building society or credit union fails. That adds up to £170,000 for joint accounts.

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

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

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

If you have a temporarily high balance, you can get protection up to £1 million for up to six months.

You can use the FSCSs protection check tool to check that 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 won’t lose your mortgage or lose your home. Your debt to the lender still stands, as do the costs for your home.

During the administration process, that debt would be sold to another bank or building society, or possibly an investment firm, and you would then owe them the money.

If you ever end up as a mortgagee with a bank that goes bankrupt, you should get clear advice on what to do and continue to make your monthly payments as usual.

Does the bankruptcy of Credit Suisse mean anything for your finances now?

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

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

Before last week, markets had jumped at the chance of a 25 basis point hike in the Bank of England’s key rate, pushing the reference rate to 4.25%.

But the collapse of Silicon Valley Bank, broader problems within regional US banks and the emergency takeover of Credit Suisse could cause the Bank of England’s Monetary Policy Committee to cancel today’s (March 23) meeting.

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

This would feed into mortgage and savings rates, with the former staying at current levels or declining slightly and the latter staying where they are.

Katharine Neiss, chief European economist at investment firm PGIM Fixed Income, said: “The Bank of England has started its rate hike cycle ahead of a number of other central banks and is in a favorable position at the moment. I therefore expect that the Bank will be on hold at its next meeting.’