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Concerns over reputation of foreign banks

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by Kay Mitchell

Since the credit squeeze and the near-collapse of Northern Rock, the reputation of banks is under close scrutiny.

Overseas banks who have entered the British market over recent years include Nigerian-owned FirstSave, ICICI of India, Dutch-owned ING Direct, Icelandic-owned Landsbanki, Icelandic-owned Kaupthing Edge and Turkey’s Akbank.

Many of the banks offer table-topping savings rates but are little-known foreign-owned institutions and reports show that a record numbers of queries relating to unfamiliar banks are mounting.

According to analysts, concern is surrounding the strength of Iceland’s economy and of its banks. Richard Killingbeck, banking expert and deputy chief executive at Close Brothers Investments in London, said in the past, these banks would have accessed wholesale markets for funding, but following the credit squeeze, that source is now closed.

It doesn’t mean these banks are in trouble, just that they are looking for alternative funding. Provided savers stick within the limits of the compensation schemes available, they should have no cause for concern, explained Mr Killingbeck.

Foreign providers offering the best deals include Icesave and Kaupthing, Turkey’s Akbank and FirstSave of Nigeria and are all regulated by the Financial Services Authority and subscribe to the Financial Services Compensation Scheme.

Consequently, this puts the protection they offer British savers on a par with that given by UK-owned banks and building societies. However, applying for recompense could be difficult and experts also warn that it is possible for some banks to operate here yet offer less than the protection provided by UK deposit-takers.

Here in the UK, 100% of deposits per person, per institution are covered up to £35,000. In the European Economic Area, which includes all EU members as well as countries such as Iceland and Turkey, minimum compensation for savers is only 90% of deposits up to a maximum of €20,000 (£15,800).

David Black of Defaqto said to date, no institution marketing accounts to UK savers has not offered the full £35,000 cover but this could happen, he explained.

Last month, Kaupthing Edge announced it would leave its rate of 6.5% untouched after the 0.25% interest rate cut in February.

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News posted: April 2, 2008

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