The eurozone crisis threatens to destabilise some of the Continents' top banks, so what does that mean for savers with cash in Spanish giant Santander, which has become one of the UK's largest institutions?

Consumers' worries have been heightened by events over recent days which have seen the crisis intensify.

  • On Friday, Spain had its credit rating downgraded by ratings agency Fitch, which also downgraded Italy. This means it has less confidence in both country's ability to meet their debts.
  • On the same day, Santander UK was one of 12 institutions downgraded by ratings agency Moody's. This doesn't mean banks are about to collapse but is nevertheless a sign of weakening confidence.
  • Today, Belgian, French and Luxembourgish bank Dexia was broken up after running into serious problems due to exposure to highly-indebted eurozone states such as Greece, Italy and Spain.

Santander stresses its UK operation is ring-fenced from its Spanish parent, so even in the unlikely event the group went bust, UK savers' money would be unaffected.

The wider Santander group and its UK arm are still seen as relatively safe, according to ratings agencies and other financial commentators.

This story is not designed to highlight any specific Santander problems compared to other UK banks. However, we've received many questions from those who've seen news about Spanish financial woes and asked how it related to Santander. So we want to explain the issues.

Is money in Santander protected?

None of us can predict what will happen to our bank, so the key is to know what protection you have.

Like with any UK-regulated institution, any money saved in Santander is protected up to £85,000 per person (£170,000 for joint accounts). Even though Santander's parent bank is Spanish, Santander UK is fully UK regulated and therefore is like any other UK bank when it comes to savings protection.

It's worth noting this isn't the same for every EU bank. A few, including Dutch giant ING Direct, opt for what's called the 'passport' system, which means their UK savers aren't covered by the UK government but must rely on that provider's home government to compensate them if their bank went bust.

Dan Plant, money analyst, says: "What's crucial is everyone with savings knows the safety limit, and the rules surrounding this. That means if you've got over the £85,000 limit, you're not fully protected and should consider spreading cash into different institutions to increase your protection.  

"Plus, those with money in the few passport-protected accounts should be aware of it and make a conscious decision whether they're happy with such protection."

As for how likely the banks are to go bust, we don't monitor the intricacies of bank solvency so we asked the ratings agencies and other commentators for their view on Santander.

Ratings agencies' view on Santander

While Moody's downgraded the bank's UK operation, Santander is still seen as one of the safer UK institutions.

Likewise, rival ratings agency Standard & Poor's (S&P) also sees it as one of the safer UK banks.

Here are S&P's ratings of the major UK banks:

  • HSBC: AA, stable outlook
  • Santander UK: AA, negative outlook
  • Barclays: AA-, negative outlook
  • Lloyds Banking Group: A, stable outlook
  • Royal Bank of Scotland: A, stable outlook

The top-notch rating is AAA.

However, ratings agencies don't always get things right, as shown by their failure to predict the true extent of the credit crunch.

Financial commentators' view on Santander

Most commentators cannot see too much trouble on the horizon for Santander's UK arm but stress savers should nevertheless be on their guard, just in case disaster strikes.

Justin Urquhart Stewart, from financial advisory firm Seven Investment Management, says: "Santander as a group is a perfectly good bank but there are risks such as its exposure to the Spanish property market. The UK arm is not showing too many signs of stress as it does not have too much overseas exposure.

"I can't believe any bank in the UK will be allowed to fail because it would be so unacceptable. Even if one were to fail, depositors' money would be protected. Nevertheless, everyone needs to be on notice to make sure they are within the compensation limit."

What Santander says

A Santander spokesman says: "In the UK, we operate under a subsidiary model. This means Santander UK is completely independent from its Spanish parent company. This structure acts as a barrier, stopping any potential problems within one part of the group spreading to other units.

"Santander also has a 'firewall' approach to borrowing and lending. This means money raised in the UK stays within Santander UK and we do not depend on funding from other parts of the global group, nor do we fund other parts of the group."

He adds that 95% of Santander UK's exposure is within the UK. It is has no exposure to Greece, the country in most trouble. Some 0.06% of its exposure is to Italy and 0.37% to Spain.