When Did Saving Become Unsafe?

Putting cash on deposit should be safe, secure and dependable. However, thanks to bad banking habits, saving is no longer what it was.

This article was first sent to Fools as part of our 'Afternoon' email series.

Recently, I received a comment from a Fool reader which went along the lines of:

"Why should I bother saving, because banks are going bust left, right and centre, so I could lose every penny?"

To me, this read like an excuse to justify not turning bad habits into good. In my view, saving is so much more than squirreling money away for a rainy day. Along with good budgeting and borrowing habits, saving is one of the cornerstones of good money-management. Indeed, without the ability to save and invest, you have no chance of improving your future financial security -- unless you win the Lottery, of course!

Saving has fallen out of fashion

Sadly, the above Fool reader is not alone, because Britain has all but abandoned the savings habit. The savings ratio shows the proportion of our take-home pay which we save. In the first quarter of this year, it stood at -1.1%, which means that we actually shrank our savings between January and March. However, as I revealed in We're Starting To Save Again, the savings ratio jumped to 0.4% in the second quarter, which is far too low, but at least it's turned positive again.

The dominoes start to topple...

So, when did saving become `unsafe'? I trace it back more than a year ago, to the evening of 13 September 2007, when BBC Business Editor Robert Peston revealed that Northern Rock had approached the Bank of England for emergency funding.

The Rock relied heavily on the wholesale market (inter-bank lending) to fund its mortgage lending and, when this market froze up, the Rock went into a tailspin from which it never recovered. The first run on a British bank since 1866 saw savers queuing around the block to withdraw their savings.

Next up was Bradford & Bingley, which was partly nationalised on 29 September, with its savings arm sold to giant Spanish bank Santander.

A backlash against foreign banks?

Last month, the economy of Iceland began to wobble, which caused leading Icelandic banks Kaupthing and Landsbanki to fold. These two foreign banks had amassed billions of savings from us, thanks to their UK arms: Kaupthing Edge and Icesave. Once again, the UK government stepped in, guaranteeing that British savers would not lose a penny. (Are you starting to see a pattern here?)

One consequence of the collapse of Kaupthing was the failure of its offshore arm, Kaupthing Singer & Friedlander Isle of Man. Likewise, Landsbanki's Guernsey arm also shut up shop, leaving its savers without any formal depositor protection scheme.

The £850 million of savers' money frozen in KSF (IoM) isn't owned by greedy tax-dodgers. Indeed, nine out of ten of its customers are British citizens, many of whom are living or working abroad and found it difficult to open UK savings accounts. Instead, they invested with `safe' offshore names such as Cheshire BS and Derbyshire BS, only to lose their life savings.

So, in one respect, saving has indeed become unsafe -- because one group of unfortunates has lost out and has yet to receive government backing. In my opinion, until this happens, saving can no longer be considered 100% secure!

Bad banking habits are to blame

I would make the point that banks didn't screw up -- on the savings side, at least. The real problem -- the dark heart of the global financial crisis -- is that reckless lending is to blame.

Finally, it's not saving that became unsteady, but lending that became reckless. Interestingly, perhaps the biggest casualties of these events are the demutualised building societies. These formerly sober institutions turned themselves into banks and threw themselves into the heady world of banking. Today, not a single building-society-turned-bank exists in its original form. Here, then, is our BS-turned-PLC list of winners and losers:

Winners

 Abbey: acquired by Banco Santander in 2004

 Cheltenham & Gloucester: bought by Lloyds TSB in 1995

 Woolwich: acquired by Barclays in 2000

 Birmingham Midshires: acquired by Halifax in 1999

 Bristol & West: acquired by Bank of Ireland

 Leeds Permanent: acquired by Halifax in 1995

Losers

 Alliance & Leicester: acquired by Banco Santander in 2008

 Bradford & Bingley: nationalised in 2008

 Halifax: took over Bank of Scotland to become HBOS; bailed out by taxpayers in October 2008; set to be taken over by Lloyds TSB

 Northern Rock: nationalised in 2008