The world's safest banks

Worried about the safety of your savings? Szu Ping Chan goes on a mission to find out which banks are the strongest in the entire world.

If you had to compile a list of the strongest banks in the world, my guess is Royal Bank of Scotland (RBS) wouldn't be very high on your list.

In February, the bank announced the largest annual loss in UK corporate history, and following a further cash injection by the government, is now 84% owned by the taxpayer.

However, the battered bank has still managed to stagger into fourth place in a list of the strongest banks in the world, beating rivals such as HSBC and Barclays, which did not take any government handouts.

JP Morgan, which came fourth last year, heads up the list by the Banker magazine. Second strongest is Bank of America, with Citigroup in third.

The respected list has run since the 1970s, and is based on the amount of tier one capital a bank holds.

Tier what?

A bank's tier one capital is an important measure of a bank's stability (although some would argue it's not as reliable as you may think - but let's leave that for another day).

It is largely made up of shareholders' equity, or the amount shareholders have paid for shares, plus any profits (minus losses) not paid back to shareholders in dividends.

So, if the total shares in a bank add up to £10, and over the next ten years the bank makes a further £1 profit per year, pays no dividends and makes no losses, its tier one capital would be £20.

In this sense, the higher the number, the stronger the bank.

Simple, right?

A boost from you and me

RBS may now be one of the world's strongest banks, but that's only because of us: British taxpayers.

The bank's tier one capital was bolstered by a massive UK government injection of $29.8bn (£18.1bn) - paid for, of course, by you and me.

That said, if you don't take the government injection into account, RBS is still ranked 7th strongest.

Why? Because for all its failings, RBS is huge, and despite its toxic assets, has a lot of high quality funding.

Oh, and one other thing, it is also the largest bank in the world (by assets).

Ouch...

All those quality assets doesn't hide the fact that the bigger they are, the harder they fall, and while RBS has been crowned the fourth strongest bank, it is also the worst in terms of losses, and dropped a staggering $59.3bn (£36.4bn) last year.

This is followed by goliath Citigroup, which lost $53bn (£32.5bn) and fellow US bank Wells Fargo, which lost $47.7bn (£29.3bn).

On the flipside, Santander, which owns Abbey, Alliance & Leicester and (what's left of) Bradford & Bingley, was ranked third highest in terms of profitability.

It's access to the European money markets, plus tougher regulation in Spain helped it take advantage (particularly in mortgage lending) when everyone else was struggling. In total, it made $15.8bn last year.

Elsewhere, HSBC made $9.3bn (£5.7bn) and Barclays $8.9bn (£5.5bn) last year. These were the only two British banks to make it into the top 25 of the Banker's profitability rankings, alongside a number of Asian banks.

This was attributed to the fact these banks have been sticking to the basics of banking - taking deposits and lending in their home markets.

Measuring safety

If you still can't separate your tier ones from your capital ratios, one other way you can measure bank strength is by taking a look at credit default swaps (CDSs).

CDSs assess how safe a bank is by measuring the cost of insuring its debt. The higher the CDS, the riskier the bank.

Back in October, CDSs were the new black, and here at lovemoney.com, everyone was fighting over the Bloomberg terminal to see which would be the next bank to go bust.

Things have since calmed down considerably since then, and CDSs in most banks have levelled since the peaks and troughs last autumn.

But one notable change in CDS spreads is in ICICI, which has tumbled down from the highs of last October, when it had a CDS of 1038.9, to 303.6 today.

This is less than a third of what it was last autumn, and a good sign that things are becoming looser in the money markets.

HSBC remains the strongest of the British banks in CDS terms, with a rating of 76.495. Santander's CDS is 91, while CDSs in RBS currently stand at 167.44. Dutch bank ING, which came 20th overall in terms of strength has a CDS of 84.82.

To put this into perspective, CDSs in the infamous Icelandic banks were trading near 3,000 basis points before they went bust.

What does this mean for you?

These numbers may not mean anything on their own, but with some of you still concerned about how safe your cash is, it pays to know who you're saving with. (Many brands fall under the same banking licence, which affects the level of compensation you can expect to receive from the Government, should the bank go bust.)

As for RBS, it may be high on the Banker's list, but my guess is it's still in for a rough ride this coming year. And now that we're all shareholders, I just hope all this touted 'strength' soon turns into profit.

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