Since the Icelandic collapse, many are questioning other foreign banks with lots of UK savers’ money. One of the big subjects in the Forum and in my mailbag is the Indian Bank ICICI. So I thought it would be worth jotting down a few brief notes.

ICICI was a best buy for a long time, so I suspect it’s amassed a large number of savers in the UK. In fact, its fixed rate savings account is still in the best buy tables. As you know, my policy is to choose best buys based on the rate and product, rather than with regards to overall solvency.

Let me run through the situation, looking at the protection levels, what happens if it goes bust, and how likely that is to happen.

How protected is it?

To operate in the UK, non-European banks must by law have FULLY registered UK subsidiaries. That means if it goes bust the £50,000 per person per financial institution protection from the Financial Services Compensation Scheme (FSCS) will apply just as much for ICICI as for Barclays, NatWest or any other UK bank.

So if you have £50,000 or less in it, your cash is safe (though of course, if it did go bust it’d be an administrative hassle and you wouldn’t have access for a few months). Anything over £50,000 ISN’T protected, and as I say with all institutions, in that case you’re best to spread savings into other accounts (see the Safe Saving guide for a full explanation and how this interrelates with other banks).

What would happen if it went bust?

The FSCS compensation is actually the secondary level of protection; after the crisis of the last year the government has shown its intent (though it hasn’t promised) to protect ALL savers cash. This has happened in two ways:

• OPTION 1: It simply shifted the savings operation/nationalised it.

  Northern Rock was nationalised totally. Yet with Bradford & Bingley and Kaupthing Edge, the government simply arranged/forced the shifting of the savings operation over to a new big parent bank (Abbey and ING respectively).

  While that can mean a few minor operational issues for the week of transition, to all intents and purposes your accounts and savings continue as normal as does access to the cash.

• OPTION 2: It paid out in full not just £50,000.

  In the case of Icesave, as it was not a fully regulated UK bank (it operated the passport exemption scheme), some of the protection came from Iceland. And it seems that meant the UK government couldn’t simply shift the savings to another bank. Instead it simply promised to protect all savings (not just up to £50,000).

As ICICI is a fully regulated UK bank, if it went bust the government should be able to go for OPTION 1; there’s no direct need for OPTION 2.

Yet of course, these are all ad hoc situations, and another bank would need to be willing to take it on, so there’s never a guarantee that what happened in the past will happen in the future.

How likely is it to go bust?

International bank (or nations) solvency simply isn’t my expertise, and it’s my view that you’re far better to rely on the protection situation than to try and second guess solvency issues.

After all, with some of the Wall Street bastions like Goldman Sachs & Merrill Lynch in trouble, as well as big British Banks like RBS/NatWest and Lloyds needing government rescues, frankly this can happen anywhere.

However I’ve compiled a list of further reading (feel free to add more in the discussion link at the end of this)

• Business Week: This is a good summary of the situation in India and ICIC in general. Link: Business Week
• Fitch Ratings: This is an agency that rates the creditworthiness of banks. The rating should be looked at as a cross between the actual rating and its stability (a rapidly deteriorating rating is a bad sign). Link: Fitch Rating
• ICICI credit article: This is a useful recent guide to ICICI’s credit ratings Link: NDTV article

Update: 11am, 31 October 2008

I wanted to keep you updated with further developments and news stories related to ICICI…

• This is Money: The Daily Mail’s money site is reviewing banking solvency, and on 29 October announced that ICICI has been removed from its best buy tables. Link: This is money
• CNN: The US news site reviews ICICI’s latest fall in profits Link: CNN News

Update: 20 April 2009

We’ve been monitoring the situation with ICICI since this blog was originally written and updated, and a few developments have led us to modify our warnings about its stability. The Daily Mail’s money site, This is Money, has added ICICI back into its best buy tables, plus various stability indicators place ICICI in similar groupings to its fully-UK peers.

Remember, saving more than £50,000 in any bank constitutes a risk, but anything under that is 100% guaranteed by the UK’s compensation scheme

Comment and Discuss.

This week interest rates were dropped by 0.5%, which you’d hope would give some reprieve to hard-pushed mortgage repayers. While we have seen some banks drop their standard variable rates, meaning some customers will be helped, I just received this e-mail from a mortgage broker (who has given me permission to publish it):

“We are a small company of mortgage advisers based in Essex, we have just received an e-mail from Abbey advising that as of midnight tonight, they are withdrawing all their Flexible & tracker mortgages, so we rang our contacts within the Abbey and were told that the new tracker & flexible deals will in fact be 0.5% higher than they are currently.

Regards,
Frank Stone
Mortgage Advisor”

I think Frank’s e-mail says it all. This is a strange marketplace, and it’s slightly frustrating that lenders don’t help themselves by leaving some crumbs in the market at the moment.

Then again, with base rates dropping the profits on trackers drop strongly. Thankfully, there are some signs of fixed rates coming down, so it’s likely they’ll get relatively more appealing compared to discounts.

Comment and Discuss

The site is burning with confused Icesave savers today, rightly worried about the news of possible nationalisation and collapse. At the moment it’s a battle to get answers from anyone, and frustrating not to be able to answer people’s questions. I’ve spoken to the FSCS, Icesave itself and the treasury today, but answers aren’t forthcoming

Should Icesave have ever been recommended?

Icesave, of course, has been recommended many times on this site, after all, it’s a UK regulated bank which had great rates. Yet for the last seven months, every note on the site that mentions Icesave has included a large WARNING, explaining it’s not protected like other banks due to the ‘passport exemption’ system, plus an explanation of the (then) £35,000 limit and what it means, and a big link to the spread your savings guide and last april’s Icesave: is it safe? blog.

My stance was, is, and will be, that we choose best buys based on rate, and explain the protection system where it differs, so people can make their own decisions. The savings safety guide has been read millions of times, is top of google, and has led the weekly email on countless occassions over the last few months…. we’ve done our best to communicate the situation.

Yet ultimately, the financial world has been turned upside down; we’ve seen once immovable bastions like Goldman Sachs, Merrill Lynch in trouble and Lehmans, as well as household names like Bradford and Bingley, go kaput. Knowing where the crunch will bite next simply isn’t possible. That’s why I’ve always focused on the protection system rather than how stable any particular bank is.

Frankly right now it’s a terrible scenario, and if I’m honest I feel emotional about it, yet rationally I know I can hold my head up high, because unlike many blind recommendations elsewhere on the web or in newspaper best buys, this site has consistently included the protection information and explained it at every point, so people can work out the risks and decide for themselves. There was little else we could’ve done, even with hindsight.

It’s also worth mentioning the scale of this site is also an issue. As I wrote in the original Icesave blog, the weekly email is my main communication mode to tell people news. If I write “get your money out” of any bank in there, as it goes to 2.5m that has a potential to cause a run on the bank, if I do that, I genuinely would be to blame.

But it’s time to take a deep breath and stay with the story, to work out how to best ensure people’s money is safe and carry on.

Press release sent today.

Unfortunately gathering information isn’t easy right now. Nonetheless, I thought you’d be interested in the brief press comments I sent out today.

Tuesday 7 October 2008

“As news floods in about Icesave, it’s crucial the UK Government clarifies its position, if not it’s unfairly leaving people panicked and worried. Countless small savers have a few thousand in Icesave’s best buy cash ISA. The ISA scheme was set up by this Government to encourage savings, and as such it has responsibility.”

“While I hope it won’t come to that, if the compensation scheme is needed, Icesave’s structure means the first €20,887 must come from the Icelandic compensation system and the remainder of the £50,000 protection from the UK scheme. Meaning its smaller savers have the most to worry about.”

“But what if Iceland can’t pay this compensation? While it’s said to have a reciprocal arrangement with other Scandinavian countries to protect its compensation scheme, the UK should be prepared to step in if necessary.”

“Yet the Treasury isn’t answering whether it will pay that money if Iceland can’t. It needs to assure UK savers that the whole £50,000 will get to them one way or another. I first asked this question six months ago; it wasn’t answered then, it hasn’t been answered yet and now it’s almost too late.”

“UK savers have been told their savings are safe in British banks. This protection is two pronged; first the Government says it’ll step in, as in the case of Bradford and Bingley and Northern Rock, and then as a belt and braces protection we have the Financial Services Compensation Scheme protecting £50,000 per person, per institution.”

“Unlike Icesave, banks thought of as ‘foreign’ like Kaupthing and ICICI are actually UK banks fully governed by FSA regulators; it’s only their parent companies which are from overseas. Due to their high rates they have billions of UK savers’ money in them and they are fully protected by the £50,000 scheme.”

“Yet does the Government see these as ‘UK Banks’ and would it bail them out if there were problems or is it only the last resort compensation we can rely on? This needs an answer… Mr. Darling, what is a British bank?”

Comment and Discuss