Since the Cyprus banking hit the headlines in March, we have been getting many enquiries from people concerned about the safety of their bank deposits.
Under an EU Directive, all European countries have a guarantee scheme to refund bank depositors up to €100,000 should a bank fail. In Spain we have the Fondo de Garantía de Depósitos. If you have savings above €100,000 the excess may be lost, though you may receive additional funds following any distribution of assets as part of the insolvency process.
In Cyprus the situation is a little different. The initial plan to tax even accounts under €100,000 was thankfully rejected, and European leaders have since emphasised that savings under €100,000 should always be protected. However, deposits over €100,000 in the country’s two largest banks will suffer heavy losses, quite possibly 50% or even more!
Those who lost money in the Icelandic banking collapse in 2008 learned this lesson the hard way, but for many other people the threat had receded. You know it can happen, but do not really expect it to. The Cyprus disaster is a stark reminder that it can.
So what can you do to protect your savings?
Remember that cash is not a ‘risk free’ asset. Besides the possibility of institutional failure (what has effectively happened in Cyprus), interest rates have been at historic lows for years and inflation has been eroding the value of bank deposits. The UK action group, Save our Savers, calculated that since the Sterling base rate was cut to 0.5%, UK savers have lost £220 billion through reduced interest and the effects of inflation. This, they say, is an extraordinary haircut of 20% of the entire value of cash savings.
I would advise against keeping more than €100,000 in one banking group. Note that the compensation limit in the Channel Islands and Isle of Man is lower at £50,000, and they have a cap on the amount they will pay out.
It has always been very important to diversify your investable capital over different assets. This reduces risk. You need to think of the cash as an investment asset in the same way as shares, bonds and property, and have suitable diversification to spread the risk.
Finally, when you deposit money in the bank it forms part of the bank’s balance sheet. Seek advice on alternative arrangements where you can “ring-fence” your assets from the institution holding them, so that if it fails, your money is protected.
As always, your investment decisions, whether to invest in shares, cash, or anything else, should be based on your personal objectives, circumstances, time horizon and risk tolerance. Speak to Blevins Franks, which has decades of experience advising British expatriates, to get tailored advice on the best asset allocation for you and as well as on asset protection.
For more information and personalised advice, contact Blevins Franks on +34 971 719 181.
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This article was written on the 16th of May, 2013.