At the latest, the financial crisis in 2007 and numerous bank insolvencies have contributed to unsettling savers. In 2011, deposit insurance within the UK was doubled to GBP 100,000. The deductible of 10% for customers of the insolvent bank was abolished. But is the money invested really secure?
What is a deposit insurance?
Deposit protection, also called credit protection, is a creditor protection. In a banking crisis it is intended to protect creditors from losing their bank balance.
This form of protection is a kind of protective mechanism in UK. In the event of a bank insolvency, the system consisting of statutory and voluntary measures takes effect.
The statutory deposit insurance for private banks
What happens in the event of bank provides security in the private banking sector.
Up to GBP 100,000 per customer and bank are protected by the law. This is described in § 7 paragraph 2 of the UK Deposit Protection Act (DPA). It also states that the compensation with an upper limit of GBP 100,000 also includes claims for interest. The claim exists from the occurrence of the compensation case until the repayment of the liabilities. In the longest case until the opening of insolvency proceedings. Married couples in particular benefit from this, as each partner is entitled to GBP 100,000. So a total of 200,000 GBP.
The credit balance on your current account, the call deposit account, as well as your savings book and fixed-term deposit is protected by the statutory deposit insurance. Registered bonds and savings bonds in your name are also covered by the deposit protection.
But be careful: Not all institutions are subject to UK deposit protection!
The voluntary deposit insurance for private banks
Many banks offer additional safeguards over and above the statutory minimum requirements. In UK, these are the deposit protection funds of the Bank. It is supported by approximately 160 banks.
This voluntary form of protection takes into account the basic amount of the statutory protection, but goes far beyond it. Subsidiaries of foreign banks usually join the UK deposit protection scheme.
The Deposit Protection Fund also protects so-called non-bank deposits, in contrast to the statutory deposit insurance. For example, the credit balances of insurance companies, public authorities and corporations.
Caution: Securities are not protected by deposit protection funds. The bank’s task is merely to hold them in safekeeping.
Deposit protection at public banks
Customers of a public bank or savings bank can also secure their invested money. The Bank Gmb is responsible for this. Some of these institutions are also members of the voluntary deposit protection fund of the Association of Public Banks.
In the case of bank, savings banks, Landesbausparkassen and cooperative banks, the rules are again different. These are not members of statutory compensation schemes. In turn, they work with an institutional guarantee. This creates a mutual liability of the members for each other. If, for example, a savings bank gets into difficulties, the other savings banks step in. In this way the cooperative banks and savings banks try to prevent insolvencies.
Deposit protection at foreign banks
The statutory deposit insurance of GBP 100,000 applies throughout the European Union (EU). This also applies to countries such as Romania or Portugal. However, not all countries that would have to step in in the event of bank insolvency are economically strong. It is therefore absolutely necessary to find out about the foreign banks that come into question. So-called country ratings and credit assessments, similar to a credit check on a person, can be requested to assess the risk. The rating indicates how high or low the risk of the respective country is. Countries classified as safe include Germany, the Netherlands and Luxembourg. Countries that perform rather poorly are Bulgaria, Cyprus and Portugal.
Deposit protection in special cases
In certain cases, the sum insured is higher than GBP 100,000. The exact cases are regulated in § 8 paragraphs 2 to 4 of the DPA. In such cases, the sum insured is up to GBP 500,000. As soon as the balance on the account is linked to a special life event of the payer, the following event, for example, can lead to exceptions:
- Need for care
- Real estate transactions in connection with a privately used residential property
In these cases, the statutory cover is higher.
What options do you have to secure your money?
The first step should always be to choose the “right” bank. Do not choose a bank that is not affiliated with the UK or a comparable (France, Austria) deposit guarantee scheme.
Decide to invest your money in a classic bank deposit such as a current account, call deposit account, time deposit account or savings account. The risk of bank insolvency can always occur, but you are covered up to 100,000 GBP. Although deposit protection has been created for this purpose, you should obtain detailed information about deposit protection and, above all, country ratings, especially from foreign banking institutions. Spread the money over several accounts (this can be at the same bank or you can open accounts at different banks), because especially in times of low interest rates it is hardly worthwhile to hope for high interest earnings with large sums of money.