How to protect your savings


Account holders are fretting about the safety of their savings accounts, but there are ways to avoid any potential problems, writes Dominic Coyle

CUSTOMERS HAVE been getting increasingly jittery in recent days about the security of bank and building society savings against a backdrop of a global financial markets crisis and seemingly daily stories of bank failures and forced sales.

It emerged this week that the Irish Financial Services Regulatory Authority has been keeping a close eye on the movement of funds into and out of Irish banks. However, Pat Neary, chief executive of the regulator, says Irish banks are resilient and have the capacity to cope with the current market turmoil.

But how real are the concerns? The first thing to state is that Irish banks are not the same as US financial institutions - or even British ones.

It is significant that most of the high-profile US names in trouble in recent days are investment banks. This is a niche market and does not compare at all with the type of business conducted by high-street banks here or elsewhere.

Secondly, as part of the euro zone, Irish banks have access to funding from the European Central Bank that is not available to their counterparts in the UK.

Thirdly, booming profits during the Celtic Tiger years meant Irish banks fortunately were late entrants to the subprime mortgage sector, ie lending to people with awkward credit histories or even to people who were clearly going to have problems repaying their loans. So, while bad debts will rise - as signalled by Bank of Ireland this week - the problem is nowhere near as significant as in some other countries.

On the other hand, it is true that Irish banks are disproportionately exposed to the property market - both in terms of residential mortgage lending and in exposure to commercial property and developers.

It is also the case that, like their peers globally, they are more dependent on global money markets than they used to be and the cost of accessing funds on these markets has risen substantially as the troubles spread through the global financial services sector.

Irish banks are unlikely at present to succumb to the current crisis but, then again, some recent problems seemed unthinkable even weeks earlier. However, customers do have some protection - the deposit protection scheme established under the EU deposit guarantee schemes directive, which provides a measure of protection for your savings.

Q So, what level of protection can I expect?

AThe first question to ask yourself is what constitutes an Irish bank. There are a wide range of deposit taking institutions in the Irish market and, when it comes to compensation not all are treated the same.

Within the Irish market, depending on which bank or building society you have your funds, four separate protection schemes operate.

If your money is invested with a bank regulated in Ireland, such as AIB, Bank of Ireland, Permanent TSB, EBS or Irish Nationwide, you will come under the deposit protection scheme operated by the Irish financial regulator. It should be noted that the Irish operations of HBOS (Halifax Bank of Scotland) also comes under the Irish rules.

They provide that depositors are protected on 90 per cent of the savings up to a maximum payout of €20,000. Thus if you had savings of €22,222, you would receive the maximum payout. If you had €20,000 in savings, you would receive €18,000 in the event of a bank collapse.

It is worth noting that this €20,000 is the minimum level of protection that EU states are required to provide under the EU deposit guarantee schemes directive and that the other schemes applicable here all offer better security. However, a review by the EU of the scheme across the EU concluded back in 2006 that the €20,000 threshold should suffice to fully protect about 90 per cent of depositors within the EU.

Q That's all very good as far as it goes but I have one savings account with about €50,000 in it. Are you saying that only €20,000 of that is protected?

APrecisely. The maximum payment you will receive in relation to your savings at any one institution is €20,000. The regulator will calculate 90 per cent of your savings - in your case €40,000 - and where this is higher than the €20,000 limit, it would pay out €20,000, nothing more.

QOver the years, I have opened several savings accounts in the same institution. Would I qualify for €20,000 in respect of each of them?

ANo. The €20,000 threshold relates to each institution. If you have more than one account there, the balances in the accounts will be totted up before assessing any payment under the deposit protection scheme. So, if you had one account with €20,000 and another with €15,000, your aggregate balance at that institution is €35,000 and you would receive €20,000.

Q What about savings accounts in separate banks?

AEach institution is assessed separately. Given that an Irish bank collapse remains unlikely, the prospect of multiple failures is something of a doomsday scenario. However, if it were to occur, you would be entitled to a maximum of €20,000 in respect of savings accounts at each separate bank or building society.

Q What happens if I have a joint account?

ADespite some misinformation on the airwaves in recent days, the situation with joint accounts is quite straightforward. Regardless of the institution, each joint account-holder is treated as an individual and the balance of the account is split between the two or more named signatories to the account. Thus, if a husband a wife have €30,000 in a joint account, each is deemed to have €15,000. This is the case regardless of whether your bank comes under the Irish, Dutch, Danish or British schemes.

Q I have both a savings account and a loan from the same bank. Will these be treated separately?

AThis brings us to the concept of "offsets". As a general rules, deposit protection schemes will offset your borrowings against your savings at any particular bank or building society before assessing your entitlement to cover on the "net" amount.

If your borrowings are larger than your savings at any particular bank or building society, you are unlikely to receive anything.

QYou mentioned there were four separate schemes, depending on which bank or building society holds the savings. Do they all operate the same way?

AWell, the broad rules are similar but there are significant differences in the amount of your savings that are covered.

As it happens, the other three schemes which apply to financial institutions plying their trade in Ireland are considerably more generous.

Rabodirect and ACCBank come under the Dutch deposit guarantee scheme. Administered by the Dutch Central Bank, it protects funds of customers in both current and savings accounts. The first €20,000 of money deposited is fully guaranteed with 90 per cent of the next €20,000. The maximum compensation payable in the event of a bank collapse is €38,000.

For customers of banks regulated under Danish law - those banking with National Irish Bank, which is now owned by Danske Bank - the first 300,000 Danish krone of savings will be covered in the event of a bank collapse. Obviously, like the UK, Denmark is not in the euro zone and so the precise value of this guarantee is subject to the vagaries of the foreign exchange markets. At present, 300,000 krone would equate to roughly €40,230.

The British system has been beefed up in recent years and provides levels of cover that make the Irish regime pale by comparison. The Financial Services Compensation Scheme provides cover on the first £35,000 of savings.

Again, the precise sum you would receive would depend on the exchange rate between sterling and the euro at the time. At this week's values, you would get about €44,200.

Interestingly, if you have accounts with separate UK banks which are ultimately owned by the same institutions, you are eligible to cover up to the £35,000 maximum for each as long as they are separately registered with the Financial Services Authority.

The banks covered by the UK arrangements are Northern Rock and Leeds Building Society.

Nationwide, the largest UK building society, which has announced plans to enter the Irish market, is also likely to come under the provisions of the UK agreement.

Q As my money is with an Irish bank, it looks like I will inevitably lose at least 10 per cent of my savings should my bank collapse. Is there any way to avoid this?

AIt should be repeated again that Irish banks have not failed. Every financial institution in every country is currently under pressure but that is a long way from any prospect of collapse. The financial regulator points out that no customer in Ireland has ever had to turn to the deposit protection scheme.

In terms of security, traditionally An Post has been seen as the "safest" place for savings - simply by virtue that its products are guaranteed by the State. However, you inevitably pay a price for this security in terms of the rate of interest on offer.

Q I have always preferred to keep my money with my local credit union. Do the same rules apply to them?

AWhile savings with UK credit unions are covered under the UK scheme, the same does not apply in the Republic. Instead, the Irish League of Credit Unions, which is the largest credit union body in the State, operates a Savings Protection Scheme.

This is funded by members and designed to provide financial assistance to credit unions in trouble. It may also be used to compensate members of credit unions should one fail.

However, the key word here is "may". It is not a guarantee scheme in the same sense as the deposit protection scheme operated by banks and building societies.

In the event of a collapse, "up to" €12,700 may be paid out to individual members, but again there is no guarantee of how much one might get.

The registrar of the credit unions, who regulates the sector, is currently working on implementing a statutory savings protection scheme that would have the same authority as the deposit protection scheme in place elsewhere.