10 tips to tell how safe your bank is

Credit agency Moody's cut its ratings on Lloyds, RBS and 10 other lenders and says while it expects the government to continue to support systemically important lenders, smaller banks are likely to be left to fail.

Paul Richardson, of Surrey-based Concept Financial Planning, said: "Consumer confidence is already weak but what Moody's has done could make things even worse.

"The Chancellor has done his best to reassure savers, saying he is confident that British banks are well capitalised. But many savers will immediately feel more exposed on the back of this news.

"That Moody's insists that these downgrades do not reflect a deterioration in the strength of the banking system is irrelevant. This is all about perception and the perception will only be bad.

"Moody's will have its reasons, of course, but many will see this mass-downgrade as an overreaction - and one that could do the banks and the country serious damage if it causes panic."

Consumers should not panic however, read on for our tips on how to tell how safe your bank is.

1 DON'T WORRY UNNECESSARILY

Deposits with all banks and building societies authorised to trade in the UK by the Financial Services Authority (FSA) are covered by a statutory safety net called the Financial Services Compensation Scheme (FSCS). This can pay compensation up to 100 per cent of the first £85,000 of lost deposits per person per authorised bank, where this is declared in default after December 31, 2010. You can see more detail about deposit limits here.

2 CHECK CREDENTIALS

You can find out whether any firm or individual is authorised by the FSA by telephoning 0845 606 1234 or going to www.fsa.gov.uk/register and searching by reference number or name.

3 DON'T PUT ALL YOUR EGGS IN ONE BASKET

Because of the maximum limits on compensation payments by the FSCS, cautious savers whose deposits exceed these sums should consider spreading their money between two or more institutions.

4 RISKS OF DELAY IN TRANSLATION

Depositors with a foreign bank that failed could have to make their first claim against a foreign compensation scheme.
A spokesman for the FSCS said: "In the event of a failure of one of these banks, the home state scheme would have lead responsibility for claims and would pay the first part of any compensation. This might cause some delays in resolving claims as FSCS may have to depend on information from the home state scheme before paying any top-up compensation."

5 BIG IS BEAUTIFUL

Size is not a guarantee of security – as today’s revelation at UBS demonstrates – but smaller institutions are likely to be more dependent on one sector of the market, such as advancing mortgages to buy-to-let landlords, and have smaller reserves against unexpected setbacks than larger banks or building societies.

6 TAKE CREDIT RATINGS WITH A PINCH OF SALT

Credit-rating agencies are paid by banks to issue assessments of them – and he who pays the piper may call the tune.
Similarly, credit-rating agencies were paid by bond issuers to assess many of the bonds – such as collateralised debt obligations (CDOs) – which contributed to the credit crisis after so many banks bought them.

7 WHAT'S IN A NAME?

Independent statisticians at Moneyfacts.co.uk point out that savers with deposits in more than one subsidiary of a group of companies are only covered by one maximum allocation of compensation per person from the FSCS.
Moneyfacts' Rachel Thrussell said: "For example, HBOS Group includes Birmingham Midshires and Intelligent Finance, as well as Halifax and Bank of Scotland. Also, RBS Group includes Direct Line and Ulster Bank as well as NatWest and Royal Bank of Scotland."
Brian Capon of the BBA added: "Savers with deposits in more than one subsidiary of a group of companies are only covered by one maximum allocation of compensation per person.
"While this is accurate if the institution is authorised by the FSA at group level, if the subsidiary businesses are authorised separately in their own right, then the compensation limit will apply to each of them separately.
In other words, it will depend on how the individual institution is authorised by the FSA.
The FSA would be able to clarify how an individual institution is authorised if this isn't immediately clear from the FSA register (which is described in Tip 2 above).

8 DON'T BREAK THE CODE

The BBA operates a code of practice setting out minimum standards for treating customers – including handling complaints – but not all banks or building societies authorised to trade in the UK subscribe to the BBA code. You can check who is covered and who is not by going to www.bankingcode.org.uk.

9 USE YOUR COMMON SENSE

A bank which is willing to advance mortgages equal to six times borrowers' income and loans up to 125 per cent of property value may not be as safe as one with more cautious lending criteria.

10 FOLLOW THE NEWS

Since the credit crisis began four years ago, much greater emphasis has been placed on financial security – or lack of it – at major banks, previously thought too big to fail. There has never been more information available about banks’ credit-worthiness in news coverage. Similarly, the share prices page gives an indication of what the stock market thinks of each bank.

taken from http://www.telegraph.co.uk/finance/personalfinance/consumertips/banking/8813110/Moodys-downgrade-10-tips-to-tell-how-safe-your-bank-is.html