How to judge the safety of a bank

It is extremely unlikely the UK Government will allow any bank operating in the UK to fail. Moreover, the Financial Compensation Scheme guarantees £50,000 per person. However, the scheme is untried on a large scale and nobody wants his or her savings to be with a failing bank. So how do you know who to trust?

Confidence in the banks has been severely dented over recent weeks. The nationalisation of Bradford & Bingley, Lloyds TSB’s' rescue of HBOS, and the collapse of the Icelandic banking system have made many people question how safe their money is.

Judging a bank's reliability is difficult even for professional market watchers. However, there are a number of indicators that you should look out for.

Ratings

Ratings agencies such as Standard & Poor's, Fitch and Moody's assess the credit-worthiness of banks and other financial institutions, including insurance companies. The ratings are designed to let other financial institutions know how safe it is to lend money to them, but they can be used by ordinary savers to get an idea of a bank's reliability (see table).

They are not perfect. Over the past year they have been criticised for failing to spot many bank's dangerous exposure to toxic mortgage-related securities. But they still have huge influence. The ratings system works differently at all three agencies but they are broadly similar. At Standard & Poor's the gradings run from AAA (the best) down to D (when a company has defaulted on its payments).

Equally fascinating are the agencies' outlooks, which are the agencies' opinion of the way a rating may move. Outlooks fall into three main categories: positive (may be raised), negative (may be lowered) and stable (unlikely to change).

Financial strength

Another indication of financial strength is the Tier 1 Capital ratio. This appears in annual reports and interim results and the higher it is the better. However, because it depends on market conditions it can change frequently and it is difficult for ordinary savers to find out what the latest position is.

The ratios included in the table show where the UK banks stood before the government announced its £37 billion bailout. Once that money is pumped into the system the ratios should rise. Meanwhile the figures for the foreign banks, ICICI and First Bank of Nigeria, are several months old and so shouldn't be relied on.

Who is safe?

So, taking all of these factors together what can we conclude. The strongest banks out there are HSBC and Abbey, backed by the Spanish banking giant Banco Santander.

HSBC, in particular, looks rock solid, being one of the few big banks to have deposits worth more than its loans. (Its loan to deposit ratio is 90 per cent which means for every 90p of loans it has 100p of deposits).

Of the biggest banks HBOS and RBS Natwest look weakest. However, presuming HBOS's takeover by Lloyds goes ahead savers should be fine.

Meanwhile, RBS is about to accept £20 billion in Government assistance and hand over 63 per cent of its shares in the process. After taking such a big stake the Government is not going to let it go under.

Bank	Credit rating	Outlook	Tier 1 Capital ratio
Banco Santander (Abbey, Alliance & Leicester)	AA	Stable	9.25%
Barclays	AA	Watch Negative	7.9%
HBOS	A+	Watch Positive	7.3%
HSBC	AA	Stable	8.8%
Lloyds TSB	AA	Watch Negative	8.6%
RBS (Natwest)	A+	Stable	6.7%
Nationwide building society	A+	Stable	9.7%
Post Office (Bank of Ireland)	A+	Stable	8.1%
ING	AA	Stable	8%**
First Bank of Nigeria	BB -	Stable	17.4%
ICICI	BBB -*	Stable	11.29%

Source: Standard & Poor's/company accounts

*Fitch rating

**Tier 1 Capital Ratio following the €10 billion cash injection by the Dutch Government

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Comments

[Mark]

only banks with 100% reserves for demand deposits are safe

http://www.federal-reserve.net/whatisthefederalreservebank.htm

[AB]

Luck is what most people seem to rely on...

[Walter Torrington]

Is there now full transparency of the high street banks' book keeping or is there more to be declared/uncovered? For example, how exposed are they, either directly or indirectly, to Credit Default Swaps which are currently carrying a risk in excess of $45 trillion according to the International Swaps and Derivatives Association?

Secondly, when the takeover of HBOS by Lloyds is finalised will they retain their own FSA registration number and thus still be covered independently for the £50,000 protection to savers, or will all the 8 high street brands currently included in the two organisations be under a single license (thus further limiting the ability of the public to 'spread' their investments)

[Paul Orian]

Dear Martin,

A bank draft is an unconditional undertaking to pay subject to the Bill of Exchange Act. A refusal to pay on demand and unconditionally entitles you to file a petition calling for foreclosing of the bank that issued it. Get your lawyers to contact the legal department of the bank that issued the draft hinting about what I just told you and I am confident that you will get your money very quickly.

Good luck

[Martin Frost]

Copy of email sent to my MP on 21st Oct.

Dear Mr Beith,

I am a small businessman based in Tweedmouth. To raise funds for my business I sold a caravan to a Mr & Mrs Wilcox – I received a bank draft for some £5,000 (purchased by the Wilcox on 14th October 08) from the Bank of Scotland / Halifax on their Hartlepool branch. On Monday 20th October I took the bank draft into the RBS Berwick, my bankers, who advised that because of current uncertainty the draft would need some 8 clear working days to process before the RBS would issue funds. This angered me so I approached the Bank of Scotland in Berwick direct for instant clearance –at first they appeared helpful but on Monday for various reasons they could not give me funds. Angered I travelled to Edinburgh where on Tuesday 21st October I spent the whole day at the Bank of Scotland Head Office in Edinburgh – the staff were discomfited but they were forbidden for a myriad of spurious reasons to give me my money – so embarrassed were they that not only did the staff not wish to give their names but they were forbidden to give me a letter of refusal to explain non payment – it was suggested that current internal bank rules ensured that the bank had use of my money for some 14 days and if such was not continued the bank would run out of liquidity. At 4pm I left the Bank of Scotland’s Head Office and with colleagues went to an Edinburgh Cheque Cash office for them to advance funds on the bank draft – at 4.30 the Cheque Cash Office insurers refused to authorise the bank draft as it could be ‘doubted’.

Your advice on what to do next would be appreciated – should I have the draft noted, advertise, and apply for liquidation ?

Yours sincerely

Martin Frost

[James]

ABN AMRO has a Tier 1 ratio of 13% and is wholly owned by the Dutch government.
I would suggest this is the safest bank to put your money in.As part of the takeover it sold LaSalle for US$20 billion which it is sitting on.

[Chris H]

One more point, aside from incorrect credit ratings, assistance is wrongly in the last paragraph ("assistence"). Who wrote this artice?

[Chris H]

The ratings you have for RBS Natwest are wrong! Natwest is rated AA- by S&P and if you took Moody's instead is Aa1 (which is one notch from Aaa). Please get your facts right!

[Ian]

How come ING is in this list? they have just accepted some finance from the Dutch government.

[Lee]

Only in the UK would you even have an article like this!! Because the FSA failed in their duty as corporate watchdog, we now warn people about what to look for. This is third world country stuff and right here in the good old UK!

[Bill Peter]

Are the rating agencies to which you referred the same ones that assessed "toxic debt" as "AAA"? Were they incompetent and complacent or complicit in a vast global fraud?