How safe is your bank?

Published:: 16 April 2009
Topic:: News,Money,Savings

In a further blow to savers' confidence one of the three bank and building society rating agencies, Moody's, has announced it has downgraded nine building societies.

The decision comes amid concerns about falling house prices and specialist mortgage loans. As a result, Chelsea Building Society has been downgraded four notches from A2 to Baa3. West Bromwich was downgraded from A3 to Baa3.

Cardiff-based Principality and Newcastle were downgraded two notches from A3 to Baa2. Norwich & Peterborough was downgraded three notches to Baa2.

Nationwide, the largest building society, was downgraded from Aa2 to Aa3. Coventry has been downgraded from A2 to A3 and Skipton and Yorkshire have both been downgraded from A2 to Baa1.

Worried savers should be aware that under the terms of the Financial Services Compensation Scheme (FSCS) the first £50,000 (£100,000 for joint accounts) held with a single institution is totally protected in the event of the provider going bust, but for some people such a guarantee is not enough.

Following recent scandals such as the collapse of Icelandic Bank and the bail-out of Dunfermline by Nationwide, an increasing number of customers want to know more about the risk of a bank or building society collapsing before they decide which institution to put their money with.

Our articles, How to keep your savings safe and Who owns who?, provide more information on the protection you get from the FSCS.

We've also compiled a table to show the ratings given to the country's major savings providers by the three main ratings agencies, Moody's, Standard & Poor's and Fitch.

Why are credit ratings important?

Recently we've seen banks around the world take steps to improve their capital reserves. The reason for this is that financial institutions balance their assets, such as deposits, property and investments, against their debts (which include loans and mortgages to retail and institutional borrowers) and they need to be able to demonstrate that their capital reserves are adequate to cover their liabilities.

Why are banks needing to build up more capital?

Banks and building societies are battling to increase their assets because loan defaults are rising - the sub prime mortgage crisis in the United States has forced many to write off billions of pounds of bad debts. Coupled with this, financial institutions have seen share prices plummet, slashing the underlying value of the business. This knocks the credit worthiness of the business (and therefore its rating) because the debts equate to a larger proportion of the firm's value.

For example, Bank A was valued at £100m last week. Its debts totalled £50m - 50% of the company's worth. The share price has since fallen so the bank and its assets are now worth just £70m. Although its liabilities haven't increased if you're looking at it in pounds and pence, in relation to the underlying value of the business they account for a larger proportion - 71% - of the company's worth.

How can banks increase their capital reserves?

There are a number of ways banks have sought to increase their capital reserves. These include boosting their deposit books (this is why we are seeing such attractive savings rates); asking existing shareholders for further investment through a rights issue (as Barclays is planning at the moment); selling off parts of the business to raise money; taking cash injections from the state government or the central bank. Here in the UK, we've seen Royal Bank of Scotland, Halifax Bank of Scotland and Lloyds TSB agree to receive emergency funding from the Government, while ING has taken a €10billion cash injection from the Dutch Government.

What impact does this have on the credit rating?

By shoring up their reserves in this way, it helps financial institutions retain a strong credit rating. This is important to both investors and retail depositors as it has a major impact on the perceived risk: The stronger the credit rating, the lower the risk. In today's uncertain times, security is of paramount importance to many savers and investors which is why many retail savers are taking an interest in the ratings given by the ratings agencies.

How are institutions rated?

As you will see from the table below, the agencies vary in the way they present their ratings. However, broadly speaking the purpose of their rankings is to evaluate the financial strength of the institution based on its ability to meet its financial commitments. And they all rate strength in a similar way - an A-rated company is deemed to be stronger and less risky than an C-rated institution.

These ratings are usually used by institutional investors; they can be very confusing for the consumer. However, given the current crisis, if you want to learn more about how your bank is rated, we've compiled a table to help you.

The basics:

The highest rating is AAA.
Moody's uses numbers as well as letters. The number '1' after a letter symbolises a stronger company than a number 2 or 3.
Fitch and Standard & Poor's, on the other hand, use plus and minus signs after the letters.
A triple rating (AAA, BBB, CCC etc) of the same letter is always better than a double rating (AA, BB, CC etc), regardless of the number or plus/minus symbol that comes after it. For example, BBB- is a better rating than BB+. But an A- is a better rating than a BBB+.

The table below, which is ordered alphabetically, shows the ratings awarded by the three main ratings agencies. Please note that the agencies don't rate all providers - we have included those that are available. Information is correct as of September 30, 2009.

Provider	Parent company & country of origin	Maximum level of protection	Rating: Fitch	Rating: Moody's	Rating: Standard & Poor's
Alliance & Leicester	Banco Santander, Spain	£50,000	AA	Aa2	AA
Abbey ASDA Bradford & Bingley Cahoot	Banco Santander, Spain	£50,000 (in total)	AA	Aa2	AA
Akbank¹	Akbank N.V, Netherlands¹	Netherlands Depositors' Compensation Scheme covers up to €100,000 (about £91,000)	BB	B1	-
Anglo Irish Bank	Irish Government	All deposits guaranteed by the Irish Government	A-	A3	BBB+
Bank of Cyprus UK	Bank of Cyprus, Cyprus	Central Bank of Cyprus Deposit Protection Scheme covers up to €20,000 (about £18,000) - remainder to be claimed under FSCS up to £50,000	BBB+	A3	-
Bank of Scotland The AA Birmingham Midshires Halifax Intelligent Finance Saga	Lloyds Banking Group, UK	£50,000 (in total)	AA-	A1	A
Bank of Ireland Post Office Bristol & West	Bank of Ireland, Ireland	All deposits guaranteed by the Irish Government until September 28, 2010	A-	A1	A
Barclays Woolwich	Barclays Bank plc, UK	£50,000 (in total)	AA-	Aa3	AA-
Britannia ³	The Co-operative Financial Services, UK ³	£50,000 ³	A-	A2	-
Capital One	Capital One Bank (Europe) Plc, UK	£50,000	A-	A2	-
Chelsea Building Society	Chelsea Building Society, UK	£50,000	BBB+	A2	-
Citibank	Citigroup Inc. USA	£50,000	A+	A3	A+
Clydesdale Bank Yorkshire Bank	National Bank Group, Australia	£50,000 (in total)	AA	Aa1	AA
Egg	Citigroup Inc. USA	£50,000	A+	A3	A+
FirstSave Bank of Nigeria	Bank of Nigeria, Nigeria	£50,000	B+	-	B+
HSBC First Direct	HSBC Bank Plc, UK	£50,000 (in total)	AA	Aa2	AA
ICICI Bank	ICICI Bank Limited, India	£50,000	BBB-	Baa2	BBB-
ING Direct Kaupthing Edge² Heritable Bank²	ING Direct N.V, Netherlands	Netherlands Depositors' Compensation Scheme covers up to €100,000 (about £91,000) ²ING Direct has taken over Kaupthing Edge & Heritable Bank's online deposit accounts	A+	Aa3	A+
Laiki Bank	Marfin Popular Bank (Cyprus)	Central Bank of Cyprus Deposit Protection Scheme covers up to €20,000 (about £18,000) - remainder to be claimed under FSCS up to £50,000	BBB+	A3	BB
Lloyds TSB Cheltenham & Gloucester	Lloyds Banking Group, UK	£50,000 (in total)	AA-	A1	A
Marks & Spencer Money	Marks & Spencer Financial Services Plc & HSBC, UK	£50,000	BBB	Baa3	BBB-
NatWest	Royal Bank of Scotland plc, UK	£50,000	AA-	Aa3	A+
Nationwide ³Cheshire Building Society³Derbyshire Building Society ³	Nationwide Building Society, UK ^³	£50,000 ^³	AA-	Aa3	A+
Newcastle Building Society	Newcastle Building Society, UK	£50,000	BBB-	-	-
Northern Rock	Bank of England/HM Treasury	All deposits backed by UK Government	A-	A2	A
Norwich & Peterborough Building Society	Norwich & Peterborough Building Society, UK	£50,000	A-	-	-
Principality Building Society	Principality Building Society, UK	£50,000	BBB+	-	-
Rothschild Reserve	N M Rothschild & Sons Limited, UK	£50,000	A	-	-
Royal Bank of Scotland Direct Line	Royal Bank of Scotland plc, UK	£50,000 (in total)	AA-	Aa3	A+
Scarborough Building Society ³	Scarborough Building Society, UK ³	£50,000 ³	-	-	-
Skipton Building Society ³	Skipton Building Society, UK ³	£50,000 ³	A-	Baa1	-
Standard Life Bank	Standard Life Bank Plc, UK	£50,000	BBB+	A2	A-
State Bank of India	State Bank of India, India	£50,000	BBB-	Baa2	BBB-
The Co-operative Bank ³Smile	The Co-operative Financial Services, UK ³	£50,000 (in total) ³	A-	-	-
Tesco Personal Finance	Tesco plc, UK	£50,000	A-	A3	A-
West Bromwich Building Society	West Bromwich Building Society, UK	£50,000	BBB-	Baa3	-
Yorkshire Building Society ³	Yorkshire Building Society, UK ³	£50,000 ³	A-	Baa1	A-

¹ Akbank N. V. is a wholly owned subsidiary of Akbank T.A.S, Turkey.
² ING Direct has taken over Kaupthing Edge & Heritable Bank's online deposit accounts.
³ Cheshire Building Society and Derbyshire Building Society are trading divisions of Nationwide Building Society. Barnsley Building Society is a trading name of Yorkshire Building Society. Britannia Building Society is a trading name used by The Co-operative Bank plc. Skipton and Scarborough building societies merged on March 30, 2009. Temporary rules are currently in place for merged building societies which run until December 30 2010. The FSA will allow a merged building society to keep separate compensation limits for customers who already had accounts with both societies before a merger. New savers who have opened an account after the merger only receive a single compensation allowance. However, the total protection for accounts opened since April 1 2009 is £50,000.