The Northern Rock crisis was a nasty reminder to us all that keeping your money in the bank isn't quite the cast-iron, risk-free option that we like to imagine it is. And despite the Government's panicky blanket guarantee that no depositor would lose their savings, consumers are understandably worried that if one bank could go to the wall, then others might follow suit. So are any banks safe?
It's important first to understand what caused Northern Rock's downfall. One way banks make money is by attracting savings from depositors and then lending them to people looking for loans, getting more in interest on the loans than they have to pay out to attract the savings.
But Northern Rock relied mainly on borrowing money cheaply in the short term from other banks in order then to lend to long-term mortgage borrowers. This worked fine until the fear caused by the erupting US subprime crisis caused the money markets' to seize up, abruptly cutting off Northern Rock's funding and leaving it with short-term debts it couldn't afford to roll over.
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The good news is that according to figures published in several newspapers immediately after the crisis, Northern Rock had by far the most exposure to the money markets. For every £1 it had on deposit, it had loaned out £3.21, said The Daily Telegraph. Even rival mortgage banks, such as Alliance & Leicester and Bradford & Bingley, which saw their share prices hammered at the time, lend out just £1.57 and £1.63 respectively per £1 in savings. HSBC was apparently the most conservative bank, lending out 97p for every £1 on deposit.
But of course, there are other things to worry about. US internet bank NetBank went to the wall last week, in this case because it had made too many bad loans to high-risk borrowers. As times get harder for the property market over here, bad debts are likely to creep higher. You would hope that most large banks are able to absorb this (although their shareholders may feel the pain), but it may be worth avoiding those that are heavily exposed to mortgage lending if you want to sleep well at night, just in case.
But as James Daley says in The Independent, perhaps the safest savings provider is the only one with full-time Treasury support Government-backed National Savings & Investment. NS&I offers a range of savings accounts, including a very competitive cash Isa that pays 6.3%. But do be aware that you can only put up to £3,000 in this account, as NS&I does not accept transfers from existing Isas at this rate. If you do want to shift your money from another provider, you'll have to content yourself with the far less attractive rate of 5.35%. See www.nsandi.com.
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