There are a few issues. When you deposit money in a bank, you are lending it to them, to use as they wish – they can use it as security to borrow lots more money, then they lend that out, and hopefully make a profit. But they’ve made a hash of this basic model in recent years, borrowing far too much, and lending unwisely. Banks can go bust. Make no mistake. In particular they go bust when lots of depositors try to withdraw their money because the money isn’t actually there. The bank has lent it out to someone else – banks are, in essence, a legal Ponzi scheme. When trust implodes, so does the bank.
Banks within the EU are underwritten by a Compensation Scheme, funded by the European Central Bank. Should the banking institutions fail, then savings of up to €100,000 (£84,300) are protected. This protection, however, is applicable to banks within the same group. To minimise the risk against the bank failing, it makes sense to spread capital across different banking groups.
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