Much of the worry stems from the confusion that exists over what protection savers do and don't have, because the protection schemes vary across European states. Here in the UK, the Chancellor, Alistair Darling has reiterated that the Government will do everything necessary to secure savers' money. We explain what protection you have and why you don't need to panic.
Has the Government announced a 100% guarantee for retail savers?
No. The Government has been under increasing pressure to offer total protection for British savers after its Irish, Greek and Danish counterparts changed their legislation to back all money held by retail savers. And following reports on Sunday that the German Government was also going to formally protect all retail savings, many commentators believed Gordon Brown would have little choice but to offer the same guarantee here. However, clarification from the Germans that their guarantee is a tacit pledge and will not be formally legislated for, has meant that the UK Government could also stop short of guaranteeing 100% of savers' money.
This will be a relief for the Treasury because with about £1.9trillion held in UK deposit accounts the Government couldn't actually afford to underwrite such a guarantee. That said, the chances of the entire UK banking system imploding meaning all savers would have to be bailed out is negligible. Instead the Chancellor has reiterated the Government's pledge to do whatever is necessary to support British banks.
This is the Government effectively saying that it will not let any UK bank collapse - we have already seen it rescue Northern Rock and Bradford & Bingley and it played a central role in the merger negotiations between Halifax Bank of Scotland (HBOS) and Lloyds TSB. And if any other institution runs into problems, we can expect the Government to take similar action.
So what protection do I have?
If you have money in an institution that is regulated by the Financial Services Authority (FSA), the first £50,000 is totally protected under the terms of the Financial Services Compensation Scheme (FSCS). So if your savings provider goes bust, you are guaranteed to get your money back up to that amount. Joint accounts have £100,000 of protection.
However, the protection applies per institution and not per account, so if you have more than £50,000 with a single provider it's worth spreading your money around between different institutions. You need to be wary though, as the FSCS definition is that you get the protection for each company that is independently registered with the FSA. Some institutions such as HBOS offer savings accounts under a number of different brands - Halifax, Bank of Scotland, Intelligent Finance, Birmingham Midshires - as well as providing savings accounts for Saga and The AA. But the group has only a single registration with the FSA so if you had a savings account with Halifax, Birmingham Midshires and Saga, for example, only £50,000 would be protected.
You also need to be careful if you have accounts with Abbey and Bradford & Bingley (B&B). They used to have separate registrations with the FSA but B&B's savings book was bought by Santander, Abbey's parent company, last week as part of the rescue package and the two providers now share the same registration.
For more information about which providers are part of the same group, read our article 'Who owns who?'.
What if I have an account with a foreign bank?
Many of the leading savings deals are offered by overseas institutions such as Kaupthing Edge, which is an Icelandic bank, ICICI Bank which is an Indian organisation, and Anglo-Irish Bank. The level of protection you get with foreign banks varies.
Some, such as Kaupthing Edge and ICICI Bank, are fully signed up to the FSCS which means you have exactly the same recourse as you do with a UK institution.
Others such as Icesave, which is owned by Icelandic bank Landsbanki, Anglo-Irish Bank and Bank of Ireland are signed up to the European Passport system. This means that in the event of the institution collapsing, you must claim through the protection scheme offered in the bank's country of origin first. If the compensation you receive is less than the £50,000 guaranteed by the FSCS, you can then claim the shortfall. The Passport system may mean you actually get a greater level of protection than here in the UK.
Savers have been piling money into accounts from Anglo Irish Bank and the Bank of Ireland in recent days as they seek extra protection following the Irish Government's announcement last week that it will offer an unlimited guarantee on retail savings until September 28 2010.
I've got an account with one of the Icelandic banks and am worried. What should I do?
Shares in six Icelandic banks were suspended today as investors feared for the security of the country's financial system. With banks such as Kaupthing Edge and Landsbanki having diversified overseas in recent years, their size dwarfs the rest of the economy. These banks have more retail savers in the UK than the entire population of Iceland and, in recent days, investors have become spooked by the country's exposure to the credit crisis.
The Icelandic Government has also guaranteed all retail savings and with two providers, Kaupthing Edge and Icesave, which is owned by Landsbanki, offering accounts to UK savers, you may think your money is totally protected - but it isn't. The guarantee applies only to funds invested in Iceland, by Icelandic depositers.
Kaupthing Edge is signed up to the FSCS and as a result savers would receive up to £50,000 in compensation were the bank to go under, as they would with any UK bank.
Icesave operates slightly differently. You are still protected up to £50,000 but it is signed up to the European passport system which means that in the event of it going bust, savers claim compensation from the Icelandic compensation scheme first (you will get around £16,000 back this way). You then reclaim the remainder, up to the £50,000 cap, through the FSCS.
Should I move my money to a foreign bank that offers a 100% guarantee?
There is no need. Although the Government will not formally pledge total protection for savers with money in UK institutions, the Chancellor's comments that the Government will do everything it needs to ensure the security of British banks is as good as.
Despite the crises at Northern Rock, B&B and HBOS, no saver has lost a penny because of the credit crunch so there is no need to panic.
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