Last weekend, First Republic Bank, the 14th largest lender in the USA, collapsed into the comforting arms of JP Morgan. It was only a couple of weeks ago that I was writing about the collapse of two American banks (albeit fairly minor ones). The British arm of one of those banks, Silicon Valley Bank, was rescued by HSBC for £1; HSBC has now reported that its profits have already been boosted by a provisional gain of $1.5 billion (yes, billion!) as a result of the “rescue”.
Whilst the business of First Republic was different to the two other banks, there were some similarities in the events that led to the rescues – a social media frenzy followed by withdrawals being made electronically. I imagine that regulators look back fondly on the days when newspaper reports resulted in physical queues of people holding their passbooks outside the Northern Rock (only 15 years ago!).
Banks have always relied on trust for their success – they work by borrowing money from depositors in the short term and then lending the same money out for the long term in the form of mortgages, commercial loans etc. They have to hope that the depositors don’t all want their money back at the same time. In the age of social media, panic can spread quickly, and, as First Republic Bank found out, this could result in a lot of depositors wanting their money back at the same time. Electronic banking makes it very easy to withdraw money at short notice, at any time.
The facts about the state of a bank’s finances are complicated and slow to emerge – they really aren’t suited to the fast moving world of social media. That, combined with the ability to move money at the click of a mouse, has created threats and opportunities – depositors in Silicon Valley Bank lived through the threat of losing their savings, whilst investors in HSBC have benefited from turning £1 into $1.5 billion (provisionally) in just a couple of weeks.
Whilst the Bank of England has been very reassuring about the state of the banking system in the UK, and it acted quickly with regard to the UK arm of Silicon Valley Bank, it isn’t inconceivable that a similar run could affect a smaller bank.
One thing that hasn’t changed is our advice about your bank deposits (we remain reassuringly dull!):
- Make sure that you have a balance of less than £85,000 per institution, per person. This will be protected by the UK’s Financial Services Compensation Scheme (FSCS). So, you can have £170,000 in a joint account and benefit from FSCS protection. There are some circumstances, where you may have a higher level of protection – such as the sale of a property, divorce or inheritance. Remember that some banks share a banking licence (e.g. Halifax and Bank of Scotland, First Direct and HSBC), so this could mean that less of your money is protected than you thought. Small businesses, SIPPs and trusts can also benefit from FSCS protection.
We do suggest that you take care with “money market funds”. Most pensions don’t give you access to deposit accounts, but instead give you access to money market funds. These funds invest in “money market instruments” which are similar to bank deposits in some ways, but not protected by the Financial Services Compensation Scheme. So, if one of the banks, in which the money market fund has invested, fails, you could lose money. The funds reduce risk by spreading your money across a large number of institutions and instruments. Our preference is for funds which give us good information about their underlying investments, and which have been reviewed by independent ratings agencies.
If you would like to know more about whether your deposits are protected or if you have a query about Money Market funds, please contact us.
Philip Wise | philip@sussexretirement.co.uk
Managing Director and Chartered Financial Planner
