Written for the Charity Market, but the same principles apply for all retail investors seeking a safe place for their deposits in the current climate...
How safe is cash?
The well documented difficulties faced by certain banks recently has once again shaken investor confidence and left question marks hanging over the Financial Services industry as a whole. The difficulties have brought to the fore the worrying situation that has been well documented as a "global credit crunch".
Over the last twelve months we have seen write downs from banks at an unprecedented scale. More recently, we have seen the collapse of Lehman Brothers in the US, huge government bail outs for the banking community, together with the liquidation of Landisbanki, Heritable and Kaupthing Singer & Friedlander in Iceland, which affected thousands of UK depositors. According to reports, up to £120m of charity funds were held with these three institutions.
Due to government intervention, the Treasury's statement states that arrangements have been put in place to ensure that all retail depositors in the Icelandic banks of Landsbanki, Heritable and Kaupthing Singer and Friedlander will receive their money in full.
Retail depositors includes those charities who are:
• a body corporate (which includes a company, industrial and provident society, Royal Charter body, and statutory corporation) which has two or more of the following:
• £6.5 million or less turnover;
• £3.26 million or less balance sheet total
• 50 or fewer employees;
• an unincorporated association which has assets of £1.4 million or less.
Charities that are not classed as "retail depositors" will not receive the same protection.
These events have no doubt caused great alarm to charity trustees and the charity sector alike, and begs the question, "How safe is cash?" and "Where do we place our deposits?". To answer this question it is worth looking at the process and protection available to charities.
Before placing funds into a deposit account, the trustees must satisfy themselves that they are doing business with a financially sound institution and are fully aware of the associated risks. It can often be a sensible idea to spread large cash holdings between a number of accounts with a number of institutions. This lowers the risk by diversifying funds amongst institutions.
In respect of the Financial Services Compensation Scheme, this currently offers compensation to retail depositors up to a maximum of £50,000 investor protection in respect of UK banks and building societies. Whether a charity is eligible for this protection, at the time of writing, will depend on it's legal structure, although the government is being asked to review the position so that all charities are covered by the scheme.
It is also important to note that protection only applies to each financial institution that is separately authorised by the Financial Services Authority. Several large financial institutions have a single authorisation for their parent company, meaning that, if eligible, charities with accounts in differently branded companies under the same parent group could only make one claim.
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