Foreign Perspectives

Archive for the ‘Finance’ Category

The liquidity ratio of a bank is something that doesn’t matter to most people but it’s something that has become rather important following the collapse of the Northern Rock this week.

Oh, sorry, it hasn’t collapsed. It just doesn’t have any money of its own to give out to its customers.

What the liquidity ratio is is the percentage of the assets of the bank that are held in cash ie the amount that they can actually pay out. For the UK, the average liquidity ratio is just 3%. That might seem pretty low but in reality it’s more than enough as there’s obviously a constant flow of deposits and withdrawals.

However, when the flow is all outwards as in the case of the Northern Rock, that 3% isn’t really enough and that’s when they need to pay a visit to the Bank of England to ask for a few quid to keep them afloat.

As we said last week, the Northern Rock is finished. In reality that probably doesn’t matter as it’ll be taken over by one of the banks that were very keen to buy it just a year or two back. Let’s not forget that that they were very highly thought of not so long ago as an excellently run mortgage bank which just goes to show that having an excellent reputation doesn’t mean that a bank is “safe” (the Equitable Life was also very well run, of course).

This all begs the question as to whether the Bank of England should support the Northern Rock. After all, it didn’t support BCCI in 1991. What’s different is that the Northern Rock is a UK owned institution and the BoE want to maintain the image of the UK banking system being a safe place to bank. Something to bear in mind when looking for somewhere to deposit your money as several of the banks paying the top savings rates aren’t UK owned.

Much as Martin Lewis generally has good ideas on his website and puts them across well in interviews, I think that he’s totally wrong on the Northern Rock issue.

His basic premise is that people shouldn’t try to withdraw all their savings from Northern Rock simply because it is only going to cause them problems and besides the bank will probably be taken over by a somewhat more secure one by the end of the week.

Well, no, I don’t believe that is right. The queues outside Northern Rock send a very clear signal to other banking outfits that people will vote with their feet and that in itself is a very important signal.

What’s equally important is that this episode has highlighted the importance of selecting a solid financial institution for your savings and continuing to check that it remains solid. However, seeing as not so long ago Northern Rock was praised as being one of the best run mortgage banks around, it also highlights that you shouldn’t keep all your money in one place unless that one place is genuinely completely secure (and bear in mind that the only place that fits this bill is National Savings). That being the case, clearly it’s perhaps not the best idea to move directly from Northern Rock to ICICI (an Indian bank heavily promoted in the UK for very high interest rates on savings).

Chances are that the bank will be taken over by the end of the week, but I don’t think it’s a wise move to rely on chance when your savings are involved. So, keep queuing and get your money out until the bank is under new ownership.

Unless you’re planning on putting the cash under the mattress, you’re going to need another bank or building society to put your money in when you take it out of the Northern Rock, but which one?

Many people will just look up the best buy tables and find that ICICI bank is right up there at 6.3% and move it right over. Somehow I’m not totally sure that putting your life savings in an Indian bank is such a good move.

Next choice would be West Bromwich though that’s a fairly small building society, whether they could cope with the arrival of ex Northern Rock customers is another matter.

Bank of Scotland seems the best bet to me with 6% from £5000 although that limits you to 4 withdrawals per year before the rate drops substantially.

But if you’re looking for absolute security, there’s only one choice: National Savings. 4.1 % from £5000 on their Investment Account, 5.15% from £50,000 on their Easy Access account. Deposits with them are effectively deposits in the Bank of England which can’t go bust. You can open these in the Post Office or online (note: these accounts are not the same as the Post Office savings account).

When a bank announces that it has a problem, the first reaction of just about everyone is to take out their money and put it somewhere else, but should you do that?

You’ll probably have heard that there’s “no problem” and that the Bank of England won’t let any bank go bust. Well, as it happens they most definitely have let banks go bust in the past. Not terribly often, granted, and the last time was with BCCI way back in 1991 in somewhat different circumstances but you certainly can’t rely on statements by various people who say that the BoE would never let a bank go bust because they are wrong: it has. More recently, Equitable Life has also been allowed to, in effect, go bankrupt.

If you’ve got a large chunk of your life savings in the Northern Rock you’d be crazy to rely on people just assuming that the Bank of England won’t let them go bankrupt. If you couldn’t do without that money, take it out.

Won’t that make life more difficult for Northern Rock? Yes, it certainly will. However, even if everything works out, chances are that within the next few days you will find that the conditions on your instant access account have been changed so that you need to give them notice to withdraw the money. Do you really want to take the chance that things won’t “work out”?

What should be learnt for this lesson is that you should NEVER keep all your money with one financial institution no matter how good their reputation (and don’t forget that the reputation of Northern Rock was very, very good). The maximum payout should things go really badly wrong is £18,000 £31,700 (100% of your first £2,000, 90% of the next £33,000).

What’s really likely to happen?

Last time this kind of thing happened was in 1991 with the Town & Country Building Society (the 15th largest society in the country at the time) which was subsequently taken over by the Woolwich (now part of Barclays Bank) in a rescue operation. Something similar seems likely to happen in this case too although it’s more complicated in some ways as the Northern Rock is a listed company rather than being a mutually owned building society.

One thing never to neglect when you’re living abroad is the cost of changing money from one currency to another yet virtually nobody considers it.

The costs can be quite substantial too. A friend of mine who was living in Brussels once casually remarked that he just used the Halifax as he did at home, lifting EUR 20 or EUR 30 whenever he needed it. He was more than a little takenaback when I pointed out that by doing that he was paying around 10% of his entire salary in bank charges. Yes, that much.

We’ve had quite a run of Brits living in Spain stopping with us on their way to/from the UK this year and I was very surprised to find that only one of them used the Nationwide credit card. Yet, that’s the only one that offers free exchange from sterling to other currencies (and all of the people concerned were living on a UK based income).

The other alternative for euro-zone countries is the Halifax which operates as Banco Halifax in Spain. They offer free transfers from UK based Halifax (and Bank of Scotland) accounts to Halifax in Spain. Although they don’t currently operate elsewhere in Europe, the Spanish outfit is quite sufficient for those in eurozone countries as you can, of course, use the supplied debit card outside Spain for purchases (it’s a bit expensive for ATM withdrawals outside Spain).

Very handy and the whole thing operates in English.