Co-operative Bank – what if it fails?

With our local banking institution, Co-operative Bank, gathering more negative attention, we felt it was important to put this news into perspective and to provide you with the facts.

They have previously been downgraded to below investment grade which means “junk” grade status, therefore the yields and returns for investing or holding money with a riskier institution should therefore be substantially higher than deposit rate returns that they are currently offering.

Co-op bank have sold their investment arm to raise capital, and have now stopped lending to new commercial customers in order to shore up funds and restore capital.

It has converted some bonds to shareholdings but its recent rescue package has been deterred by major institutional investors.

It is negative news such as this that leads to customers moving money away from Co-op which in turns causes a run on the bank and increases loans to deposit ratios, increased capital inadequacy, and so a downward spiral begins.

What happens if my bank fails?
You will be covered under The Financial Services Compensation Scheme (FSCS). It covers all companies regulated by the FCA, and is funded by charging levies to companies authorised by the FCA.

Under the FSCS, customers’ deposit account savings are now guaranteed up to a maximum of £85,000 per customer per institution* – or £170,000 for a joint account. If a customer has more than £85,000 and that bank collapses, the scheme will pay only the maximum £85,000 per person per institution* – but they could still receive additional funds as part of the insolvency process. Interest owed to customers up to the date that the bank is found to be “in default” would also be treated as part of the compensation.

* Please note the “institution” caveat, which means that if you hold money in what you think are two separate banks, they may be considered just one institution and thus limited to £85,000 across the two banks. For example, the Co-operative Bank controls Britannia Building Society and so are considered one institution.

Having said that the FSCS has never actually had to pay out for the failure of a major UK bank. As demonstrated recently, it is likely that the UK government would do everything it possibly could to avoid the collapse of a British retail bank before this became an issue.

The moral of the story is you should be receiving higher rates of interest for the perceived increased risk to your money and ensure that you are keeping less than £85,000 with one “institution”!

This blog post was written by Paul Lindfield, Director of Wealth Management for Manchester independent financial advisors, Sedulo Wealth Management.
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