Should you get out of Bank of Cyprus UK?

Thousands of Britons have savings in Bank of Cyprus UK. But the bank isn't covered by Britain's Financial Services Compensation Scheme. And with rising fears that Cyprus may be swallowed up by the eurozone debt crisis, should British savers be worried? Ruth Jackson reports.

As the debt crisis in the eurozone mounts thousands of British savers with money in the Bank of Cyprus UK are growing increasingly concerned about the safety of their savings. The Mediterranean islands' exposure to Greek banks, coupled with local crises, including a huge munitions explosion that wrecked vital infrastructure, has led to all three of the big credit rating agencies downgrading Cyprus in recent months. The Bank of Cyprus UK has operated in Britain for 55 years and 50,000 people have savings accounts with it. If you are one of them, what should you do?

Most accounts are fixed-term and savers will face penalties if they decide to withdraw their cash. That's one reason not simply to demand your money back. The bank's marketing manager, Richard Simon, has also pointed out that the bank has a healthy deposit-to-loan ratio, is well funded, and doesn't rely on the money markets for funding. "I would not be unduly worried if I had money in a fixed-rate account with the Bank of Cyprus," says Kevin Mountford of MoneySupermarket in The Sunday Times.

One feature of the Bank of Cyprus UK will nonetheless worry some savers it isn't a member of Britain's Financial Services Compensation Scheme. This protects deposits of up to €100,000 (£85,000) per person and double that for joint accounts, in the event of a bank collapsing.

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Instead, Bank of Cyprus UK customers are covered by the Cypriot deposit protection scheme, which protects up to €100,000 per depositor with compensation paid out in euros. Fine, but the concern is that "any compensation scheme is only as safe as the government backing it", says Justin Modray of Candid Money, also in The Sunday Times. And right now the Cypriot government isn't looking very safe.

Indeed, comparisons are being drawn to the Icelandic banking collapse in 2008. Then the British government had to step in to compensate savers when the Icelandic government couldn't afford to. The difference with Cyprus is that it is a member of the European Union (EU). So if the Cypriot government can't afford to compensate savers then the European Central Bank would have to step in.

So an awful lot would have to go wrong for existing British savers to lose their money at the Bank of Cyprus UK. Those with €100,000 or less already deposited should think hard before facing the penalties for withdrawing it all. Meanwhile, anyone looking for a new home for their money should look elsewhere as the bank isn't offering top table interest rates anymore.

Ruth Jackson-Kirby

Ruth Jackson-Kirby is a freelance personal finance journalist with 17 years’ experience, writing about everything from savings accounts and credit cards to pensions, property and pet insurance.

Ruth started her career at MoneyWeek after graduating with an MA from the University of St Andrews, and she continues to contribute regular articles to our personal finance section. After leaving MoneyWeek she went on to become deputy editor of Moneywise before becoming a freelance journalist.

Ruth writes regularly for national publications including The Sunday Times, The Times, The Mail on Sunday and Good Housekeeping, among many other titles both online and offline.