What's causing the banking crisis and how to protect your money
BY Harvey Jones
30th Mar 2023 Managing your Money
With another banking crisis looming, we look at the causes and how you can ensure the safety of your savings
As if the world didn't have enough troubles, we now face a repeat one of the biggest financial disaster of the millennium, as another banking crisis looms.
It seemed to spring out of nowhere, with the sudden collapse of Silicon Valley Bank (SVB) in the US, then Credit Suisse in Switzerland, and nobody can say how bad it will be. The crisis could blow over, or it could get much worse. Either way, it's worth taking a few basic steps to be sure your own money is safe, regardless of what happens.
What’s causing the banking crisis?
A lack of returns on low-risk investments encouraged riskier investments
The seeds of today’s banking meltdown were planted after the last one, when central bankers such as the US Federal Reserve and Bank of England propped up the creaking financial system by slashing interest rates and flooding markets with cheap money via Quantitative Easing, or QE.
As the returns from low-risk investments like cash and bonds plunged, desperate investors poured money into riskier assets, such as US tech stocks and bitcoin, in what became known as the “hunt for yield”.
"As the returns from low-risk investments like cash and bonds plunged, desperate investors poured money into riskier assets"
Then inflation took it off last year and central bankers responded by hiking interest rates at the fastest rate in 30 years.
As borrowing costs surged and overpriced assets fell, the financial system started to crack and banks came tumbling down.
How bad could the banking crisis get?
So far, no UK banks have failed, but pressure is growing
So far, regulators have protected depositors, which has prevented a wider run on the banks as panicky savers race to withdraw their cash.
Bigger banks have swooped on ailing rivals, with HSBC buying the UK arm of SVR for just £1 and Swiss bank UBS buying Credit Suisse for £2.5billion, a fraction of its former worth.
"Now markets are holding their breath to see which bank will struggle next"
Now markets are holding their breath to see which bank will struggle next. With inflation high and interest rates rising, the pressure is growing. At the time of writing, no UK bank has failed, as defensive walls erected by the Bank of England after the last financial crisis hold firm. Let's hope it continues.
How can I protect my cash?
Most saving accounts are protected by FSCS
Even if your own bank did crash, you shouldn't lose your money. All deposits in UK-regulated banks are protected by the government-backed Financial Services Protection Scheme, or FSCS.
The FSCS is independent and free to use and will compensate the first £85,000 of savings you have with any bank. For jointly owned savings accounts, that doubles £170,000.
The £85,000 limit hasn’t been increased since 2007. If it had increased with inflation, it would now be £131,414. Given that the average Brit has just £17,365 of savings, it should still be enough for most people.
What if I’ve got more than £85,000?
Savers with more than £85,000 can still get full FSCS protection, by spreading their money between different banks and building societies. The FSCS cap applies per banking licence, rather than per person.
There’s a catch, though. Some of the bigger banks have several brands under the same licence. For example, Halifax and Bank of Scotland are both owned by Lloyds Banking Group. HSBC and First Direct also share one licence. For example, if you saved £85,000 with HSBC and £85,000 with First Direct, only half your money would be protected.
"The FSCS only covers cash deposits. If you have money invested in the stock market, you’re on your own"
If you’re worried, check if your bank accounts share a banking licence by searching the financial services register, or contact your bank.
The FSCS does not cover a number of foreign-owned “challenger” banks that operate in the UK, notably Lithuanian-based Revolut. Check what safeguards they offer. However, it does cover popular savings providers including Renault-owned RCI Bank, the State Bank of India UK and Bank of Cyprus UK. Again, check.
Under rules introduced in July 2015, the FSCS covers temporary high balances, say, following a house sale or inheritance, up to £1 million for six months. The FSCS only covers cash deposits. If you have money invested in the stock market, you’re on your own.
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