What happens if your bank goes to the wall?

Sep 19, 2008

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The collapse of Lehman Brothers and fears for other financial stocks have again raised doubts about the health of Britain's banks. While it seems unlikely – particularly given Gordon Brown's current woes – that a high-street bank with a brand known and used by millions would be allowed to fail, it's still worth knowing exactly how you might be protected should the worst happen.

The Financial Services Compensation Scheme (FSCS) guarantees up to £35,000 of your bank deposits. The Financial Services Authority is considering raising this to £50,000, but there has been no decision as yet. It's important to remember that this £35,000 limit applies per bank. For example, Halifax and Bank of Scotland are part of the same group, as are HSBC and First Direct, so if you had £35,000 in two separate accounts you would only get £35,000 back – not £70,000. This is something that Derbyshire and Cheshire building society members especially should bear in mind – after the takeover by Nationwide, all three count as one unit for FSCS purposes. The other thing to bear in mind is that this is not a pre-funded scheme. The money is not sitting around in an account somewhere waiting for a crisis. Instead, should there be one, funding must be raised from the rest of the banking community. So don't bet on getting your money back in a hurry, or with interest!

So what should you do if you have more than £35,000? You could split it between several banks. An alternative, for those who can't be bothered with the hassle, or who have too much money even for that, is to put your money with National Savings & Investments. It doesn't have the best rates, but it is backed by the government. Or you could open an account with Britain's other national bank – Northern Rock. The Government is still guaranteeing the full amount of any money deposited with the bank, and it has to give at least three months' notice of any changes to this condition. The bank's instant-access savings account pays 6%.

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