Finding a way through the maze of bank guarantees

PERSONAL FINANCE:The Government has extended the bank guarantee scheme - that much is clear - but for many people what is not clear is what exactly is covered. Here is a simple guide to what it's all about

CONFUSED BY THE Government’s latest extension to its deposit guarantee scheme? Don’t worry, you’re not alone. In fact, all the comings and goings have left many readers in the dark as to how well their savings are protected.

When the scheme was first launched at the height of the credit crisis in September 2008, the guarantee, which covers all deposits with certain named institutions, was due to last until the end of September of this year.

Then, last December, the Eligible Liabilities Guarantee Scheme, covering term deposits in qualifying institutions in full for up to five years was rolled out.

Now, following approval from the European Commission, the initial scheme has been extended until the end of December 2010. But what does the latest extension actually mean for savers and should they be worried about the security of their cash?

WHAT PROTECTION DO I HAVE ON DEPOSITS OF LESS THAN €100,000?

If you have money on deposit of less than €100,000, then the amendments to the guarantee scheme won’t affect you. Instead, you will be covered on amounts up to this figure by the Deposit Guarantee Scheme (DGS), which applies per person, per institution and has no end date.

So, if you have €50,000 deposited in three separate institutions, you would, if the worst came to the worst and all three banks collapsed, be covered for the full €150,000.

The scheme applies to: current accounts; demand deposit accounts; term deposit accounts; share accounts and deposit accounts with building societies; and share accounts and deposit accounts with credit unions.

Its reach extends to 16 deposit taking institutions in Ireland, or shortly 14, as both Postbank and Halifax are on their way out.

WHAT ABOUT DEMAND DEPOSITS OF MORE THAN €100,000?

While the first €100,000 of your money is covered as normal under the DGS, the latest extension to the guarantee scheme means that any balance in excess of €100,000 is also covered until the end of this December.

The guarantee applies to all types of deposits you can withdraw on demand, including current accounts, but it only applies to seven institutions: AIB, Anglo Irish Bank, Bank of Ireland, EBS, ICS, Irish Life Permanent and Irish Nationwide.

When it comes to notice accounts, the guarantee is similar to that for on-demand accounts, except that the guarantee will also last for any notice period, if notice of withdrawal is made before December 31st 2010, even if the withdrawal date extends beyond the end of this year.

ARE TERM DEPOSITS OF MORE THAN €100,000 STILL COVERED?

If you have a term deposit, whereby your money is locked away for a certain period, you will now be protected for the first €100,000 under the DGS, but whether you are entitled to any more protection will depend on when you placed the money on deposit.

Under the Eligible Liabilities Guarantee Scheme (ELG), which was introduced last December, term deposits in qualifying institutions are protected in full for up to five years.

However, in order to qualify for this protection, savers must meet a certain time restriction – ie, they must have placed their deposits with the institution after it has joined the scheme, but before the new deadline of December 31st, 2010.

The instititutions which are covered by the ELG are: AIB, Anglo Irish Bank, Bank of Ireland, EBS, ICS, Irish Life Permanent and Irish Nationwide.

So, if for example, you placed €200,000 in a term deposit with AIB on January 15th, you will find that you are only eligible for protection on the full amount until September 29th, 2010 – and won’t benefit from the latest extension – as the bank joined the ELG scheme only on January 21st. After this, you will only be covered for the first €100,000 under the DGS. If, however, the deposit was placed with BOI, you will receive protection for the full €200,000 for the term of the deposit, up to five years, as it joined the ELG on January 11th.

If you wish to place money on a term deposit now and receive full protection, you have a window of opportunity in which to do so, as the qualifying period has been extended until December 31st. To check a list of participating institutions, and when they joined the scheme, see the Department of Finance’s website: finance.gov.ie.

WHAT HAPPENS IF I HAVE MONEY ON DEPOSIT WITH A FOREIGN BANK?

Depending on the institution in which your money is on deposit, you may find that you will be protected under the DGS, or you may find that you are only eligible for protection under that bank’s “home country” rules.

If, for example, you have an account with a bank that operates in Ireland, but is regulated in its “home country”, then you would usually make a claim under the compensation schemes that is operated in that country.

Northern Rock, Investec and Nationwide Building Society are all covered under the UK’s Financial Services Compensation Scheme, which offers protection on deposits of up to £50,000 (€60,200).

Dutch bank Rabodirect is covered under its home country’s scheme, which guarantees €100,000 per person per bank, while savers with National Irish Bank are protected by the Danish scheme, which currently covers the first €50,000, but this will be increased to €100,000 by October 1st.

Savers with both Northern Rock and National Irish Bank will find that they are also covered under Ireland’s DGS, which protects the first €100,000.

WILL THE SCHEME BE EXTENDED AGAIN?

In line with the European Commission’s rules, the ELG scheme must be reviewed every six months, so the next review will take place in advance of December 31st, 2010.

Whether or not it will be extended however, will depend on the banks’ ability to raise finance themselves by that point. The latest extension includes higher premiums, which, according to the Commission, provides “an incentive for banks to refinance themselves on the markets without state support”.

WHAT OTHER SAVINGS SCHEMES ARE STATE-GUARANTEED?

If you are one of the 3,500 or so who have invested €80 million in the National Solidarity Bond so far this year, you may be concerned about how well such funds are protected. But you should take comfort from the fact that such deposits are 100 per cent secured by the Government, up to the maximum investment allowable of €250,000.

Similarly, all deposits in An Post products such as savings certificates and savings bonds are fully guaranteed by the State.