Shock waves have run through the financial markets in recent weeks as previously believed rock-solid banks in the US and the UK have gone under. Even the giant banks like Citibank, UBS and HSBC have incurred billions of dollars of losses through their unwitting ventures into the risky sub-prime US mortgage business. Little did people imagine that when they entrusted their hard-earned savings to the big banks much of that money was to be thrown to the wind. Fortunately the major banks are large enough to withstand the battering, although one or two have come perilously close to the edge. Have any customers lost any money so far? Most have been fortunate; the UK government stepped in when Northern Rock failed and guaranteed that no-one would lose any part of their savings. Those with larger accounts could have lost all their money in excess of around £30,000 in their account. The losses are now being borne by the British taxpayer. In the US several small banks that failed were bought out by larger banks so no-one lost any money. In the case of IndyMac however, customers will have lost any balance they held in excess of the first $100,000 which is covered by a federal insurance guarantee. It is estimated their losses are in the region of $500 million.
So is money still safe in the bank?
Recent events have dented the public’s confidence. It is not just a matter of poor investment decisions. The high technology of the banking systems has brought new dangers. One of England’s oldest banks, Barings, was put out of business in the nineties by a single rogue trader, Nick Leeson. He was able to stake the whole of the bank’s assets without anyone at the top being aware. When his trading gamble went wrong all the money in the bank was lost. Depositors were saved only because a white knight in the form of the Dutch bank ING came along and bought out Barings Bank together with all its liabilities for one pound. Incredibly the same thing happened a decade later when another rogue trader almost brought the French bank Societe Generale to its knees with billions of Euro in trading losses. The bank may not have survived the blow elsewhere but the French government vowed not to let the bank fail or fall into foreign hands. Such pride does not motivate the Swiss government which has stated it would not support a failed Swiss bank, no matter how large and prestigious.
So how much could you lose?
If your bank failed you may be fortunate enough to lose nothing if another bank or the government takes it over. If not, you could lose anything in excess of the amount guaranteed by any scheme in place in that jurisdiction. In the US for example, the first $100,000 in any bank is guaranteed. In the UK and Isle of Man the guarantee is around £30,000 (US$60,000). In many countries, including Singapore, there is no guarantee! What about Indonesian banks? For a while the government gave a blanket guarantee covering all accounts. This was a political necessity to prevent the mass exodus of funds. But no government can afford to underwrite the entire banking system. Had there been a collapse on a massive scale the government would simply have printed more money. So you would have got your money back on paper but that’s about all it would have been worth. Fortunately the tactic worked and there were no bank failures. The blanket guarantee has now been watered down to more realistic levels and the banks in general are now better supervised and are exercising more diligence. But if your bank did fail your guaranteed level of cover is limited and don’t count on getting your money back quickly.
So to play safe, what is the answer?
First of all, you have to ask yourself if keeping a large amount of cash in the bank is the best way to save money. Inflation in most parts of the world is overtaking bank interest rates. This means that even if your money is safe it is losing real value day by day. Nevertheless it is important to keep adequate cash reserves for short term needs and contingencies. There are many ways to earn a higher return but they need a longer time horizon to bear fruit; trying to get high returns in a short time can be risky.
So having determined how much you need to keep in the bank, you then have to decide what currency you should be holding. Generally, we should hold the bulk of our savings in our ‘base’ currency, or currency of end use. You may have more than one base currency and if you are an expatriate planning to spend the rest of your days in Bali it would be unwise to hold too much in Rupiah because of its history and likelihood of future devaluations. When I first came to Indonesia in 1983 the rate of exchange was Rp.600 to one US Dollar. Don’t be tempted just by high interest rates. A large currency movement can wipe out the value of a year’s interest in one day.
Spread it around!
Despite the recent shocks the global banking system is still in place and pretty sound. But because we never know what new surprises are around the corner it would be wise to follow the golden ‘not too many eggs in one basket’ rule. If you have a large amount of cash don’t leave it with one bank. It may be a hassle with today’s paperwork and anti-money laundering procedures but holding a number of smaller accounts – and maybe in different jurisdictions – is more prudent than amassing a large account in one bank just to get a higher rate of interest or to make you popular with the bank manager.
Another way to keep your money in the banking system but in many accounts is to invest in a money fund such as Zenith (formerly Rothschild and Insight) or JPM (formerly Jardine Fleming) Money Funds. These funds place investors’ money in a wide range of accounts with a number of banks; the deposits are converted to units and the assets are held by Custodians so the risk is limited to a partial loss should one of the banks fail.
Looking beyond cash
It should be clear by now that the absolute safety of bank deposits is just a myth. Not only do your savings lose real value day by day but there is also a small but real risk of losing part or all of them.
So where else should you be placing your hard-earned savings over and above the necessary current accounts and short term deposits? There is a huge universe of opportunities. You could be looking at stocks, bonds, hedge funds, oil, gold, precious metals, agriculture, commercial property, real estate, private equity or your own business. Any one of these can outperform by far any return you will get in the bank. But each comes with a different kind of risk. If there are no earth-shattering events to take precedence we will look at the relative risks and returns of these various asset classes in four weeks’ time.
Colin Bloodworth, Financial Partners
World Trade Center 8th Floor, Jakarta and
Jln. Sunset, Kuta, Bali
colin.bloodworth@financial-partners.biz
(Note: this article reflects the writer’s views and not necessarily those of Financial Partners
