Many Fools have taken out a savings account with Icelandic bank, Kaupthing. Following financial turmoil in Iceland, is this account safe?
We've recommended the Kaupthing Edge instant access savings account several times recently. This is because this account pays out a cracking 6.55% AER in interest and there are no catches, bonuses or gimmicks.
What's more, Kaupthing has given a guarantee that its rate will be at least 0.3% higher than the Bank of England's base rate until February 2012.
Concerns
Unfortunately, however, the financial crisis has sparked concerns over Kaupthing's future. Fools may be worried that their savings are no longer safe.
To understand more, we need to look at a financial instrument called a Credit Default Swap (CDS). These swaps are insurance-like contracts that promise to cover losses on certain securities if the issuer goes bust.
So, for example, you might own Barclays corporate bonds. If you're worried that Barclays might go bust, you could buy a CDS in Barclays. Then if Barclays did fold, you'd get your money back on your bonds.
We can see the latest CDS rates on our Bloomberg screen at Fool HQ, and as I write, you'd have to pay 2.48% for a CDS in Barclays. However, the rate is much higher for Kaupthing - currently it's 23%. So the market thinks Barclays is a safer bet than Kaupthing.
This doesn't mean Kaupthing is necessarily going to go bust. But it does mean that at least some investors think it's very risky.
Iceland
Why have investors become so worried?
On Monday, the Icelandic government nationalised another bank, Glitnir, which was bound to trigger concern. What's more, Iceland's economy is in serious trouble - inflation has reached 14% and the Icelandic Krona has fallen 32% against the euro over the last month. And credit in Iceland is reportedly tightening fast.
That said, I think Kaupthing has done the right things over the last year. As a result, it's in a stronger position to cope with the turmoil.
It has cut back on lending and has worked hard to attract money from savers. It also sold part of its UK business in August and has raised extra cash from the stock market. Indeed, a new investor came in on September 23 when a member of Qatar's royal family bought a 5% stake in the bank for $285m (£161m).
Kaupthing also has operations across Europe - it's not reliant solely on the Icelandic economy.
What now?
It's dangerous to make firm predictions in the current climate but I don't think Fools should be too concerned. I think Kaupthing will probably get through this. As I say, the bank has been well-managed recently and has done the right things.
But since we've recommended Kaupthing Edge so often in the recent past, I thought it only responsible to warn Fools there are concerns about its future in this difficult financial climate.
Even if I'm wrong, and Kaupthing does run into trouble, the Icelandic government may organise some form of rescue as it did with Glitnir. Admittedly, Kaupthing is a large bank compared to the size of the Icelandic economy, but other countries may help out the Icelandic government. It's in all of Europe's interest to limit further banking crises.
In the UK..
The good news is if you have a savings account with Kaupthing Edge in the UK, it's operated by a subsidiary called Kaupthing, Singer and Friedlander. This means that any account in the UK is fully protected by the Financial Services Compensation Scheme (FSCS).
So if Kaupthing did go bust, you could claim back all your savings to £50,000, and you wouldn't have to deal with any organisation in Iceland. (The FSCS ceiling is going up on Tuesday from £35,000 to £50,000). The only problem with the FSCS is that we don't know how quick the payments would be - it might take a few months.
Of course, the FSCS may not even come into play. The UK government stepped in when Northern Rock, Bradford & Bingley, and HBOS hit trouble, and it may well do the same for Kaupthing, Singer and Friedlander.
What should you do?
If you have less than £50,000 in Kaupthing Edge, you can rest assured that your money is protected. If you have more than £50,000, it might be prudent to move the excess somewhere else - just as you should with any British bank.
The absolute safest places for your money are Northern Rock, and National Savings & Investment. However, Northern Rock is trying to halt the flood of new savers so you may have to hurry.
The Irish banks are also backed by a 100% guarantee by the Irish government. So you might want to consider the Anglo Irish Bank Easy Access Deposit Issue 2, which is currently paying 6.4% on savings.
We live in extraordinary times, but let's remember that no UK saver has lost money as a result of the current crisis. And given the likelihood of government rescues, I reckon that will remain the case.
More: The Safest Places To Deposit Your Money | The Safest Way To Save (And Beat Tax & Inflation) | The Government Must Guarantee Savings! | Profit From Credit Default Swaps