In the wake of the troubles that beset Credit Suisse, many have questioned the security of other well-known financial institutions and whether a widespread financial crisis is looming.

As part of these dire predictions, people have wondered what will happen to their money in the event that a bank collapses and whether their hard-earned cash will be safe.

Fears of losing all your personal wealth should be quashed by the Financial Services Compensation Scheme (FSCS) which was set up in response to the 2008 financial crisis so that depositors’ money was protected.

Disclaimer: this information is only relevant to those living in the UK and is not a substitute for professional financial advice.

The FSCA protects – in the event of collapse – £85,000 per person per financial institution.

This means that if you had £100,000 deposited at one bank you would be in line to lose £15,000 if the bank was in the unfortunate position to fail.

Although this is a pretty simple premise, there are a few caveats and points to note with regards to the application of the FSCS.

Firstly, the protection applies ‘per financial institution’. In practice this often means per bank however technically it’s per FCA banking licence leading to a few exceptions. Lloyds Banking Group own Halifax and Bank of Scotland who share a banking licence meaning your £85,000 is shared between the two banks while sister banks RBS and NatWest have separate licences so you get £85,000 per bank.

Another (nicer) caveat is that joint accounts get £170,000 protection. This doesn’t mean you have an extra allowance – just that the FSCS considers it the money of two individuals and therefore has two allowances.

Additionally, savings of up to £1 million are covered if they result from a ‘life event’. This could include redundancy, a house sale, an inheritance or a compensation payout which would leave you with a temporarily high balance that would be protected should the bank fail.

Finally, if you want to keep your money in 100% safety, you could save with National Savings & Investments (NS&I) who are a government-backed savings institution and would require the government to fail for your money to be under threat (which would pose more serious issues).

In order to ensure your money is protected, it’s advisable to spread your money across financial institutions if you have over the £85,000 limit so that you do not lose money in the unfortunate event a bank fails. It may also be helpful to have some money elsewhere if FSCS payouts take a while to process.

You may be wondering whether a bank would actually be allowed to fail to such an extent that the government would accept the public losing money.

Technically it could happen however there are many steps to come beforehand before a bank collapses such as receiving extra credit from the Bank of England, selling the bank to another financial institution or ensuring shareholders take the hit before consumers.

Although this provides peace of mind, you should still ensure you are as protected as possible by the FSCS as it is the strongest protection you will have against potential bank failure.

Do comment your thoughts below.