How to protect your money in a banking crisis

The threat of a new banking crisis raises the question: how secure are my savings?

The International Monetary Fund warned yesterday that the risk of severe financial system turbulence has “increased rapidly” over the past six months due to high interest rates and recent turmoil in the banking sector.

Fears about financial stability have grown since the collapse of two major foreign banks in March.

The sudden fall of Silicon Valley Bank in the United States, shortly followed by the emergency sale of Credit Suisse, rattled global markets as investors feared the onset of another banking crisis.

Deposit holders at SVB’s £6.7billion UK subsidiary wondered if their money was in trouble, before HSBC rushed to buy the business.

Technology-focused lender SVB’s reliance on an industry that has seen funding shrink and valuations plummet has paved the way for its downfall, while Credit Suisse has long been dogged by scandals and management reshuffles.

Nonetheless, the magnitude of these failures reminded people of the institutions left behind after the financial crash of 2008, even as banking regulations have since tightened.

Jamie Smith, financial adviser at Foster Denovo, said a few of his clients had contacted him about SVB’s collapse and asked how it might affect them.

“My response was to remind them that their money, even their cash savings, carries risk,” he said.

“At the time of the credit crisis, there was a systemic thaw in the banking system. It could happen again. But banks’ capital cushions have now made that less likely.

Don’t be surprised by banking licenses

The crash of the 2000s spawned a slew of fintech startups, many of which still rely on banking licenses that don’t belong to them.

This is very important in relation to the Financial Services Compensation Scheme (FSCS), which insures individual customer deposits up to £85,000 and joint accounts up to £170,000.

As Daniel Wood, financial planner at 7IM, explained: “There is a big risk that people are not aware of, and that is that FSCS protection only applies by banking license.

In other words, if you have more than £85,000 in cash deposited in more than one company, but they use the same banking license, you are only insured up to the first £85,000, even if These are completely different companies.

Mr. Wood cited the example of HSBC and First Direct. But the rule may also apply to fintech startups, many of which simply haven’t been able to raise the investment capital needed to embark on the arduous journey of getting licensed.

“The licenses they use should be highlighted much higher on their websites, especially by fintechs where it can take minutes to open an account,” Wood said.

For those wondering how they can find this information, Mr Wood said banks should have a section explaining which banking license they use.

If they don’t, customers should know before opening an account to avoid breaking FSCS rules later.

One way for savers to do this is to use the FSCS Banking and Savings Protection Checker. Nick Lambert, director of financial advisory firm Progeny, said it would show deposit holders how protected their money is, and they can do the same with pensions and investments.

NS&I – unless the UK fails you’re good

An “obvious choice” for those who want complete peace of mind is the NS&I public savings bank, according to Mr Lambert.

“Here all your money is completely safe because it is a government savings bank, with the backing of Her Majesty’s Treasury,” Mr Lambert said.

Or, as Mr Wood put it: ‘Unless the UK completely fails, you’ll get your money back.’

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