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Are your savings safe with Santander?

This week ratings agency Moody's Investors Service downgraded the debt issued by 16 Spanish banks by between one and three notches.

Moody's cut the rating of Banco Santander to A3, the same as the Spanish Government's own rating. At the same time, it downgraded the rating of British arm Santander UK to A2.

In other words, Santander's UK arm has a higher credit rating than its parent, which is reassuring for UK savers with cash on deposit at Santander.

What is Santander UK?

The big question is: should British savers worry about the safety of their cash on deposit with Santander UK?

Before answering this question, I should first explain what Santander UK is. It is the umbrella company for a number of British banking brands acquired during the Noughties by Santander. These brands include:

  1. Abbey (formerly Abbey National), bought in 2004 and rebranded as Santander in January 2010;
  2. Alliance & Leicester (A&L), acquired in October 2008 and rebranded at the end of 2010;
  3. The savings arm of Bradford & Bingley (B&B), rescued in September 2008 and rebranded in January 2010;
  4. Cahoot, Abbey's online bank; and
  5. Cater Allen, a private bank owned by Abbey.

While Cater Allen has its own, separate banking licence, the other four brands all share the same bank licence. This is important.

Your savings safety-net

After the near-collapse of 'rogue lenders' Northern Rock in September 2007 and Bradford & Bingley a year later, the Government enhanced the national safety-net for savings.

Since December 2010, the Financial Services Compensation Scheme (FSCS) guarantees all of the first £85,000 of cash savings (including interest) per person per institution. This limit doubles to £170,000 for joint accounts.

However, it's not immediately obvious what an 'institution' is.

Put simply, if a bank has its own, separate banking licence, then it has its own £85,000 protection from the FSCS. However, if two or more banking brands share the same licence, then £85,000 is the overall limit for combined balances across these brands.

Let me show you how this works. Let's say you are a super-saver with three lots of £85,000 in three separate accounts: one each with Santander, Cahoot and Cater Allen. In total, you have £255,000 stashed with Santander UK.

Cater Allen has its own licence, so your entire £85,000 in this account is covered by the FSCS. However, Cahoot and Santander share a licence, so only half (£85,000) of your £170,000 in these two accounts is covered.

Santander is still safe

Santander UK is run as an entirely separate, independent subsidiary from parent company Banco Santander. It raises its own funds in the capital markets and from UK savings deposits, as well as issuing its own UK mortgages and loans.

Santander UK is a UK-regulated entity and, therefore, cannot transfer UK assets to assist its parent company without approval from City regulator the Financial Services Authority (FSA). Of course, it is highly unlikely that the FSA would allow Santander UK to weaken itself in this way in order to boost its parent's balance sheet.

Even so, the only real reassurance in this uncertain world is that provided by the FSCS, because it is backed by the British Government's own AAA credit rating -- the highest in the world.

Banks do go bust

If you don't believe that banks can go bust, just ask British savers in failed Icelandic banks Landsbanki and Kaupthing. When Landsbanki's Icesave arm went bust in October 2008, the UK Government compensated British savers by returning 100% of their savings (and not just the £35,000 limit that applied back then).

However, given that our national debt now stands at more than £1 trillion, the UK Government has a lot less financial firepower to bail out beaten-up banks than it did nearly four years ago.

More on the economy:

How the eurozone crisis affects us

How to survive the eurozone meltdown

UK falls back into recession