Are Britain’s Big Four REALLY safe?

Experts say a rocky ride still lies ahead after huge bailouts ease fears of new financial crash

THE spectre of Lehman Brothers is stalking the markets again. Fifteen years after the collapse of the US lender triggered a global economic recession, a fresh banking crisis has unfolded with frightening speed. In the past few days lifeboats have been launched on both sides of the Atlantic to rescue stricken banks. It follows the sudden collapse of Silicon Valley Bank, the 16th largest in the US, after a classic bank run that saw depositors pull out cash in droves.

Silicon Valley Bank’s UK arm, a lender to thousands of technology firms, was snapped up by banking giant HSBC for a pound.

As panic spread, two smaller US lenders – Signature and Silvergate – were also shut, before San Francisco-based First Republic was bailed out by a group of Wall Street banks in a £25billion rescue.

But it was the plight of Credit Suisse – a far larger bank deemed to be ‘systemically important’ to the global financial system – which overshadowed everything.

Credit Suisse, Switzerland’s second biggest bank, saw its share price sink to new lows as contagion fears mounted, despite the Swiss authorities throwing the lender a £45billion liquidity lifeline. It has now been put up for sale.

Nouriel Roubini – the economics guru nicknamed ‘Dr Doom’ for predicting the 2008 crash – called the Credit Suisse situation a ‘Lehman moment’ for global markets. That the Credit Suisse chairman is Axel Lehmann (no relation) invited parallels.But there the similarities end, say experts. Unlike in 2008, this bout of jitters didn’t begin in the US, but in the rapid rise in global interest rates to fight inflation fuelled by soaring energy prices.

Investors have been dumping supposedly ‘safe’ government bonds – or

IOUs – as a series of central bank rate rises offer better returns. That has eroded the value of bond holdings at major banks, which use them to offset ‘riskier’ investments.

The first sign that all was not well came in autumn when British pension funds were forced into a fire-sale of Treasury bonds – or gilts – after exChancellor Kwasi Kwarteng’s disastrous mini-Budget. The sell-off revealed huge amounts of previously hidden borrowing in the pensions system. The ship was only steadied when the Bank of England stepped in with a £19billion bailout.

So how safe are our banks? Rules introduced in the wake of the last crisis were meant to make them more resilient to shocks and prevent more taxpayer-funded bailouts. Banks all over the world built up capital cushions – rainy day money – to absorb losses, either on dud loans if the economy faltered or on bad bets like government bonds. But under the Trump administration these rules were watered down for regional lenders like Silicon Valley Bank and First Republic.

Former Bank of England deputy governor Paul Tucker warned the US authorities in 2019 that relaxing funding requirements would end in tears. As American banks begged for bailouts, he told The Mail on Sunday: ‘No one cares about stability until they scream for help.’

Sir John Vickers – former Bank of England chief economist and an architect of UK banking reform – thinks British lenders need more capital in their funding structure.

An analysis by The Mail on Sunday found that the ‘big four’ banks – Lloyds, NatWest HSBC and Barclays – reduced their capital cushions last year as they showered shareholders with billions of pounds in dividends, share buybacks – and, of course, showered themselves with bumper bonuses.

High street banks collectively made £40 billion in 2022 in net interest income – the difference between what they charge borrowers and pay savers. This has angered depositors, but has also made banks more robust. Chancellor Jeremy Hunt said last week: ‘UK banks are well placed to deal with this volatility. The wider UK banking system remains safe, sound and well-capitalised.’ What happens next depends on how regulators and policymakers react.

Central banks are caught between a rock and a hard place, say analysts.

‘They are still supernervous about high inflation, but fresh rate hikes run the risk of prompting fresh financial instability,’ said Susannah Streeter at Hargreaves Lansdown. Others urge against overreacting.

‘Now is not the time for tighter regulation,’ said Tim Congdon of the Institute of International Monetary Research. ‘If anything capital requirements should be relaxed.’ Central banks should make loans available to banks that are ‘basically solvent’ he added. ‘The last thing we want is a replay of 2007-8. When banks were forced to hold more capital they stopped lending and the global economy was plunged into recession.’ Ultimately, banks rely on trust for their very existence. Credit rating

‘Until they yell help, no one cares about stability’

agency Moody’s said in a recent note to clients: ‘When confidence is punctured, contagion can be rapid.

‘Banks’ balance sheets are often complex and opaque, with interlinkages and exposures that are often only known after the event.’

The inflation shock and rapid increases in interest rates are likely to ‘have further consequences for the financial sector’, it concluded.

In other words, expect more mayday moments on the choppy seas of high finance. There should be no need to jump overboard, but keep a life jacket handy just in case.

THERE is little more disconcerting than news of bank runs, government bailouts and plunging bank share prices – all of which we saw last week. Silicon Valley Bank in the US collapsed and HSBC had to bail out its UK arm. Then troubled banking giant Credit Suisse announced it had secured a £45billion lifeline from Switzerland’s central bank. Meanwhile, shares of UK banks have been buffeted about.

But although the headlines may sound as if they have a whiff of the global financial crisis about them, the circumstances are very different.

Banks are in a lot better nick than in 2008. They have to comply with beefed-up Bank of England regulations and they are regularly stress-tested to see how they would manage in a variety of difficult events. Even if something did go wrong, UK savers and investors benefit from a number of protections.

YOUR CASH SAVINGS

IN THE very unlikely event that your bank, building society or credit union goes bust, you should get your savings back, so long as you meet certain conditions.

Firstly, the provider holding your cash must be authorised by the Financial Conduct Authority (FCA) and covered by the Financial Services Compensation Scheme (FSCS). They should advertise clearly if they do have this coverage. You can also check on the FSCS website at fscs. org.uk/check/check-your-money-is-protected.

Secondly, you will only get back savings worth up to £85,000 per bank. If you have a joint account, you’re covered up to £170,000. Laura Suter, head of personal finance at investment platform AJ Bell, says: ‘This means that ideally you don’t want more than £85,000 with each provider, even if it’s spread across different accounts.’

Protection is across all accounts held within the banking group, not per account, so watch out for banks with a number of brand names. For example, First Direct is owned by HSBC and Royal Bank of Scotland is another brand under the NatWest bank.

You may get protection of up to £1million for up to six months if you have a temporarily high balance.

YOUR INVESTMENTS

YOUR investment provider should not go bust. They are very tightly regulated precisely so they don’t. Even if it does, your provider should be holding your money safely in a separate client account. If something does go badly wrong, you should receive FSCS protection worth up to £85,000. Furthermore, if an authorised firm gives you bad advice or is negligent in its management of your investments, you will be covered.

However, you will not be compensated if your investments drop in value as a result of movements in financial markets. That is just part of the risk of investing.

Before investing, check that the firm is authorised by the Financial Conduct Authority or the Prudential Regulation Authority. Make sure that it is regulated to do the particular activity that it is offering you, for example giving investment advice.

Some investment types offer no protection. These include cryptocurrencies, mini-bonds and peerto-peer lending.

YOUR PENSION

SHOULD your pension provider go bust, the compensation you’re entitled to will be determined by the type of pension you have and if it is regulated by the FCA.

Defined contribution pensions:

These are pension schemes where both you and your employer pay in a set monthly amount.

Although these schemes are arranged by your employer, your money is held and managed by a separate pension provider. That means that if your employer goes bust, it will not affect your pension holdings. Whether your savings have FSCS protection should the pension provider go bust depends on how your scheme was set up. You can check this with your pension provider.

Self Invested Personal Pensions: In most cases, if your Self Invested Personal Pension (Sipp) provider were to go bust, you would receive up to £85,000 FSCS compensation.

However, some providers structure their Sipps so all of your savings are covered. Ask your provider what protection it offers.

Defined benefit pensions: Also known as final salary, this type of workplace pension offers a guaranteed income in retirement. It is up to your employer to ensure there is enough money available to pay out.

Pension funds are usually ringfenced from the company balance sheet, so even if your employer gets into financial difficulty your pension should be protected.

If the scheme can’t pay, your pension is taken over by the Pension Protection Fund (PPF), which is a lifeboat fund set up by the Government.

Becky O’Connor, director of public affairs at pension provider PensionBee, says: ‘The PPF will compensate you for 100 per cent of your pension if you’ve already reached the scheme’s retirement age at the time your employer goes bust.

‘If you haven’t yet reached the scheme’s retirement age, you’ll only be entitled to 90 per cent compensation, to a set limit.’