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PERSONAL FINANCE: What’s the risk to my money in banks?

To meet regulatory demands, banks have been holding government debt and holding high quality liquid assets, but those capital values have deteriorated as interest rates have risen
To meet regulatory demands, banks have been holding government debt and holding high quality liquid assets, but those capital values have deteriorated as interest rates have risen To meet regulatory demands, banks have been holding government debt and holding high quality liquid assets, but those capital values have deteriorated as interest rates have risen

THE last two weeks’ columns explained the issues with Silicon Valley Bank (SVB), Credit Suisse and Deutsche. I hope that was helpful. And now on to bank shares as a whole.

Bank safety is vitally important to an economy, in that confidence in deposits provides our floor, both politically and economically.

The issues in SVB and Credit Suisse were specific to them, not to the UK banking sector. But are there any risks there to you and your savings?

On January 2, the UK banking sector index sat at 3288. By March 1, it had soared over 19 per cent to 3918. Rising interest rates will do that of course, as banks’ margins – the difference between what they can charge compared with their costs – increase, so profits follow.

UK bank shares responded to SVB by plummeting over 17 per cent in three weeks (March 24) to 3248 for no real reason other than “what’s going on; what do I not know; reduce exposure”.

The Bank of England stated clearly: The UK banking system is well capitalised and funded and remains safe and sound.

There, column over? Get another cup of tea. Maybe.

The key is to look for systemic risk, i.e., a vein that runs through a system that you don’t expect or wouldn’t expect. How many of you knew about AT1 bonds before last month? Now you do.

Are unrealised losses in banks’ books potentially systemic? I’d argue they are, but that’s the US, where as long as you don’t encash your losses, they don’t exist, i.e. you still state they are the book price you paid for them. That’s a tad nuts. As interest rates rise those losses become greater, but the banks’ solvency appears fine as they are reporting the original purchase price in their balance sheet (head scratcher).

The biggest swing in the unrealised losses was of course SVB, but other banks have five per cent swings. If interest rates carried on increasing, the true value of these assets is way less, so a run on such an institution such may mean it has to sell the assets at current value rather than what it paid for them. That could be enough to nail a bank – hence the Fed’s rapid establishment of life-supporting lines of credit. Just in case.

My view is that the balance sheet should report the actual true value of the market assets as they are. That would force a bank to recapitalise rather than having a run on it and having 48 hours to live.

That isn’t the UK or European banks though, just regional banks in the US.

As you know from the past, capitalists became socialists when they needed something. Poorly run banks taking excess risks were bailed out. AIG had a $180 billion bailout, which sounds a lot when you write it down.

Now, remember Becker was the CEO at SVB. Well, he was rallying around as a board member of the local Federal Reserve wanting to relax the rules around stress tests. Remember he was bonussed on return on equity.

Well, the UK is pushing through changes called the “Edinburgh Package” (Scotland will get the abuse if it goes wrong) which include reviewing ring-fencing measures, overhauling London’s listing regime and loosening up what insurers can invest in. I’m not sure who is doing the lobbying here, but this will need to be observed closely. (See the point above re: systemic risk).

AT1 exposure is what impacted Credit Suisse, alongside the ‘uniquely’ Swiss response by wiping them out. European banks have AT1 exposure to 2.2 per cent of their risk weighted assets, with Barclays and Julius Baer at 3.9 per cent and 7.2 per cent respectively. In the event of default, AT1 bondholders bear the risk so that taxpayer don’t have to.

To meet regulatory demands, banks have been holding government debt and holding high quality liquid assets, but those capital values have deteriorated as interest rates have risen.

Your personal risk of loss is protected in your own bank accounts. You are protected up to £85,000 per person per institution by the FSCS, who repay you in seven working days if there was a default. Watch out for holding money in apparently different banks though, where they are part of the same group, as the protection is per institution. There are over 1,500 PRA-authorised banks, building societies and financial institutions in the UK, so plenty of choice.

In contrast, your cash on a prepaid card or in a Paypal account is not protected.

:: Peter McGahan is chief executive of independent financial adviser Worldwide Financial Planning, which is authorised and regulated by the Financial Conduct Authority. If you have a financial query or would like investments advice call Darren McKeever on 028 6863 2692, email info@wwfp.net or visit www.wwfp.net