Whose Bank is it Anyway

In amongst the news items over the past week, you cannot have failed to notice news of the spectacular collapse of the banking system in Iceland, with all three major Icelandic banks being put into recievership. The problem impacts people in the UK because two out of the three having popular British operations who thanks to high ratings were being used for local council reserves, and through their regular placement at the top of reputable lists of the best savings accounts the banks were popular places for the general public – including a number of financial journalists – to put their savings.

Looking through the various comments that have been posted online about the crisis – and especially the bailout by the UK government – there is a substantial minority criticising savers for not using a British bank. The question us though, what is a British bank?

Some of the biggest names on the high street are no longer owned by British companies. For example if you are a customer of Abbey, your bank is now Spanish owned. On the other hand HSBC is based in London, but has massive international interests so you could perhaps argue that this isn’t a UK bank either.

Okay, maybe we define a UK bank as one which is fully UK registered under the UK compensation scheme. No help there as both Icelandic banks that were active in the UK market had parts of their business registered under the scheme and other parts using the passport scheme relying on the Icelandic compensation scheme – both parts of both companies have folded. You also make some surprising discoveries, for example by that by that definition the British Post Office isn’t a UK bank. Whilst you can obtain National Savings products through a Post Office, the Post Office has it’s own branded financial products which are from the Bank of Ireland, and are registered under the passport scheme – I doubt many people putting money in at their local Post Office realise that if that goes under they’ll be left claiming their money back from Dublin.

How about defining it as companies that are active in the wider UK economy? No help there as a look at the Landsbanki Disclosure table reveals – investments right across all parts of the UK economy.

It’s not like investors were taking a punt on some dodgy foreign investment, stuffing internationally addressed envelopes with cash. Both banks had UK addresses, and had superb credit ratings – or else numerous local authorities would not have been allowed to invest in them. The UK consumer offerings were being recommended across the board as being a good investment, with numerous money journalists investing their own money, indeed some sites are now explaining how they were caught out.

The simple fact is that in these days of world financial markets there is no such thing as a UK bank, and all the patriotic flag waving isn’t going to change that. The UK market includes banks from India, Spain, Cyprus and Ireland alongside those from UK companies, and they all have business interests, liabilities and customers across the world, hence why our economy has been impacted by the collapse of the housing market in the USA. Indeed institutions can be destroyed almost by guilt by association, for example two out of the three Icelandic banks were thought to be financially sound when the third was nationalised, but following a classic bank run on the remaining two, all three have now gone under, and the entire country looks set to follow. Whilst we’re not quite as reliant nationally on financial services for prosperity as Iceland, over recent years a lot of our wealth as a country has come from the city, and a large number of peoples jobs are in the financial services sector. As such it is a truly frightening proportion of our money as a country that is being offered to prop up the banks.

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