Thoughts re: FSCS and saving with a Challenger bank (Vanquis say)

peteduk

Hello,
I am in the fortunate position of having a cash lump sum that I don't want to invest in the stock market but would like to earn a "good interest rate" on. I have therefore been attracted to Vanquis fixed rate bonds of 3 to 5 years duration. Using Vanquis as an example (but other 'challenger banks' may have a similar lending background) I am considering how safe my deposit would be.
Vanquis are part of the Provident Financial Group and lend money via 'Home credit', car loans and credit cards to 'those who are not well served by mainstream lenders" - Vanquis in particular providing credit cards.
It therefore seems to me that the financial performance of the Provident Financial Group will 'suffer' due to the financial repercussions from COVID-19, and that even if Vanquis is a separate entity within the group it will suffer also.
Normally I would be reassured by the FSCS (Financial Services Compensation scheme) but I understand it is funded by a levy on the financial institutions it protects. They may not be in a position to fund any increased levies if they face increased stress. Further, the latest FSCS budget seems to have been set before the effects of the Corona virus became apparent.
I believe the pandemic will have a significant negative effect on the economy and wonder if the Government will be able to 'step in' to support banks politically or economically if the FSCS cannot..
I know it is my decision to balance my own risk but wonder am I just overthinking or if anyone else is having similar thoughts.

Thrugelmir

Borrowers pay the levy. After the Icelandic banking crash bailout there was a deficit. This was recovered by an additional levy on the institutions. Which was passed onto their customers. The majority is actually paid by mortgage holders. 

bowlhead99

Though the FSCS gets its money from industry rather than from government - if it's short of cash because the financial services industry take a while to pay their increased levies, it can take a limitless loan from UK treasury to make good its commitments to provide depositary compensation to qualifying individuals and small businesses if their deposit-taking institutions have gone bust, and collect the money back from the financial services industry later.  It's in the national interest for people to be able to trust the safety of their deposit (up to the compensation limit) with any licensed UK bank, building society or credit union otherwise the license is worthless.

So no need to worry as long as your deposit taking institution is covered and you haven't gone over the threshold with any one  banking license holder.

afis1904

What the government can afford is almost exclusively a political decision. There's no risk with any FSCS (who is mostly funded by banks) backed savings and it would be incredibly unpopular to not back up FSCS

Albermarle

Your money is safe, but  it is true that these smaller saving banks are exposed on the lending side during this current crisis , just like the big banks are, but normally they are more focused on a couple of areas of lending.
Typically they are lending to SME's ; involved in car finance; mortgages etc where short term payment holidays are an issue.
There must be as many as 20? of these specialist lending/savings banks, so would not be a big surprise if at least a couple of the weaker ones got into trouble. Maybe more likely they would get taken over than actually go bust, unless their loan book was really that bad .

Malthusian

If the FSCS runs out of money the Government will print as much money as it needs.

If the FSCS was allowed to run out of money, the entire population would queue up outside every single bank to withdraw their savings and stuff them under the mattress, and the economy would literally collapse.

The risk when holding a large amount of cash in an FSCS-protected deposit is inflation, not that your money might disappear.

peteduk

Thanks to all. I appreciate and follow your reasoning and reassurances.
It appears no-one considers the risk of a bank bail in by creditors (aka depositors) is likely despite legislation possibly providing for it in Europe, the US and the UK?

kuratowski

Deposit insurance and bail-in are complementary.  Any bail-in of a bank would trigger the FSCS compensation.  Depositors' funds are only at risk if they hold in excess of the £85k limit with a single institution.

Thrugelmir

peteduk said:

Thanks to all. I appreciate and follow your reasoning and reassurances.
It appears no-one considers the risk of a bank bail in by creditors (aka depositors) is likely despite legislation possibly providing for it in Europe, the US and the UK?

UK banks have spent the last 10 years or so rebuilding their balance sheets and undergoing stringent regulatory annual stress tests. Very different to the GFC era which weeded out a few badly run banks. Far better placed than some European banks. Which haven't undergone the same rigorous rebuilding process. 
While the likes of JP Morgan, Goldman Sachs, Wells Fargo etc may take sizable hits. Unlikely to see any of the US majors actually fail. 
Metro bank is probably one of the weaker UK outfits. Challenger banks otherwise aren't heavily into lending money out. 

bowlhead99

peteduk said:

Thanks to all. I appreciate and follow your reasoning and reassurances.
It appears no-one considers the risk of a bank bail in by creditors (aka depositors) is likely despite legislation possibly providing for it in Europe, the US and the UK?

In a UK bail in, the people with FSCS-eligible deposits (i.e. individuals and SMEs) will qualify as a higher tier of creditors, just as they would in a liquidation, so that the bondholders and other unsecured creditors (such as suppliers of services, or institutional depositors who don't get FSCS protection) can be bailed-in first and given shares of the bank instead of the debts owed to them by the bank.

The amounts that are actually covered deposits (i.e. the first £85k of your deposit) will get an even higher tier creditor status above the rest of the eligible deposits and the other unsecured creditors.

So, when the banks then go to the government with their begging bowl out looking for a bail-out to stave off collapse, they can say they have already done a bail in and bank shareholders already got wiped out by the creditors in proportion to the amounts that were owed, so they have basically done their best to restructure, but the people with eligible deposits or covered deposits haven't been bailed in yet, and still have their deposits. Which is perfectly allowable under the rules.

Because presumably, the government will be satisfied that the small retail depositors do not actually need to lose their deposits in a bail in because that bank would never be trusted again by consumers and there would be no point even trying to bail it out and have it continue as a retail bank. 

So:
- if there's a bail in of your bank, worst case scenario it's feasible that the bank *could* bail-in your deposit and not pay it you back, but then you could go to the financial ombudsman who would say they have to give it you back as per the product terms, and if they are still in business they will have to give it you back. And if they are not in business because they failed after doing the bail-in while hoping for a bail out that didn't work, you can call on the FSCS up to the compensation limit, like you can do with any failed financial services business that owes you money from a protected deposit.

- more realistically, they would not bail-in your deposit if it was an FSCS eligible deposit because they are not required to do that (all the other deposits and creditors would suffer first), and they know the government doesn't want them to bail-in covered deposits because it would cause the public to distrust banks in general which would cause a 'run' which is in nobody's best interests. 

In conclusion the possiblity of a creditor bail-in of a UK bank if it falls on hard times shouldn't be a problem for a UK retail depositor who has kept himself within the FSCS depositary protection limits. Because either:

 (a) the bank will simply fail and you can call on FSCS protection; or

(b) they will not fail because they have a successful bail-in which doesn't involve you losing your deposit, so you don't need FSCS protection; or

 (c) they will not fail because they have a successful bail-in which does involve you losing your deposit, but then the non-failed bank would need to compensate you for it in cash, which they could do because they hadn't failed, so you don't need FSCS protection; or

(d) they fail after doing a bail-in and/or a bail-out, and don't return your deposit, and so you call on FSCS depositary protection just like you did in the scenario (a) where they hadn't tried to do a bail-in or bail-out.

Source: me saying pretty much the same thing on this forum the last time it came up in the context of Covid-19 related uncertainty, not very long ago.

As for legislation possibly providing for bail-in scenarios in places other than the UK - in the EU or US for example - I'm less familiar with those justifications but wouldn't deposit large amounts in those countries' banks without looking into what is covered and what isn't and how the practicalities would work. 

Albermarle

Metro bank is probably one of the weaker UK outfits. Challenger banks otherwise aren't heavily into lending money out. 

It seems to me that 'challenger banks' is a rather wide ranging term . For example you have 

Second tier banks to the Big ones , like TSB, Co-op , Sainsburys bank etc

Disrupter banks , mainly just offering current accounts , credit cards etc via Apps /appealing to young people : Monzo, Atom , Tandem etc

Specialist lending/savings banks ( usually with the best rates ) like Vanquis; Aldermore: Charters ; Shawbrook etc 

The OP's original question was relating to the latter type and my comment/guess was that they might be vulnerable as they are mainly lending to SME's; car finance; mortgages and in the case of Vanquis offering credit cards to people with poor credit ratings.